A Dangerous 'Shell Game'
A “reverse merger” is another method by which a private company can go public. In a typical reverse merger, a private company merges with a public company that often has no assets or liabilities. The publicly traded corporation is referred to as a “shell” since all that exists of the original company is its corporate shell structure. By merging with such an entity, a private company becomes a public entity.
The private company merges into a public company and obtains the majority of the public company's shares. The private company changes the public corporation's name to its own, appoints and elects its management and Board of Directors, assumes management of any assets within the shell, and assumes all liabilities of the shell company. The fact that the public shell does not have any assets does not discount the fact that it is a live public company. Because the corporation previously passed through the registration process with SEC, it has shareholders, and free-trading stock. It is a public company.
The only advantage of a reverse merger is speed. A reverse merger generally allows a company to 'go public' within weeks rather than months or years.
The reverse merger path does present some serious risks such as:
- The purchase price of a public shell can run as high as $500,000.
- Regulations require audited financials filed within a week of deal closure.
- Public Shells usually come with no cash or liquid assets.
- Liabilities and obligations usually pop-up and must be settled, often in court.
- The prior shareholders usually own cheap stock, selling it against every rise in price while diminishing the value of your capital.
The 'quick-buck-shell-game' on the Pink Sheets or Bulletin Board, with chaps from Denver, Los Angeles, and Boca tossing regulatory terms like '504-D' and 15c(211) around your offices is a sure sign of onrushing corporate apocalypse. These "bankers" will consistently offer drops in your bucket ("whenever you need it") fifty or a hundred thousand dollars at a time. Eventually, the support they so readily offered will disappear as your shares somehow manage to sink to below a penny with angry shareholders replacing the shell-game gadflies.
The greatest pitfalls occur when within a venture one follows a pathway of expediency out of a sense of urgency or desperation.
