In need of funding? Reverse mergers may provide capital.

If you have been following our blog, you know that venture capital deals have declined in the New York area in second quarter of this year. A PricewaterhouseCoopers report has revealed that a third quarter count of deals made during Q3 were limited to 999. The first quarter of 2013 was the last time the deal count headed below 1000. If your young company is searching for funding, these statistics do not bode well for your bottom line.

One piece of advice that startup mentors provide to entrepreneurs is to study the benefits of engaging in a reverse merger. When a reverse merger takes place, a private company acquires a public company, skipping the procedures connected with an Initial Public Offering. As a result, the private company can sell stock on an exchange and raise funds faster than they would have in following the traditional IPO process.

Benefits associated with this public presence include increased visibility to customers, greater access to capital markets and a liquidity of funds. All of these benefits can attract stronger candidates for employees, creating a positive cycle for the company.

Should you consider the reverse merger to be a viable option for your company, here are some points that you should keep in mind:

1. Research the public company that you seek to acquire.

Many private companies have suffered from a lack of due diligence when investigating public companies. Those with excessive debt or liabilities may seek to pass their problems onto the purchasing company. It's necessary to uncover the public company's motivation for finding a buyer. Reputable brokers know how to vet companies and locate any problems before they are passed on to an unsuspecting buyer.

2. Budget for the cost connected with going public.

Those entering the corporate market may not be familiar with the financial responsibilities of a publicly traded company. According to a Forbes review, conducting audits, presenting disclosures and providing quarterly reports are just a few of the tasks that must be completed to promote transparency. Retaining personnel to maintain compliance can cost up to $1 million dollars a year for public companies.

3. Learn how to inspire shareholders to support your cause.

It is in the sale of stocks that allows private companies reap the benefits of acquiring a public company. The price of admission to an expanded market includes purchasing the public company and paying experts to guide your company through the reverse merger, both of which can total more than a half-million dollars. After the process has been completed, the increase in the stock's value will strengthen your company's budget. To do so consistently may require your company to pivot from your original focus and take a different perspective to satisfy shareholders.

In spite of the risks connected with reverse mergers, many companies prefer the certainty this method provides over the traditional IPO. Those considering using the reverse merger as a means to gain access to the public market are advised to speak with a knowledgeable business attorney.

No Comments

Leave a comment
Comment Information
Email Us For A Response

Tell us about your legal matter

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

The Jin Law Group
200 Park Avenue
Suite 1700
New York, NY 10166

Phone: 646-863-9110
Fax: 646-862-9620
Map & Directions

Rated by Super Lawyers Ruth Jin Rated by Super Lawyers G.Oliver Koppell ABA Defending Liberty Pursuing Justice Institute of International Economic Law New York City Bar NYSBA New York's Women Leaders in the 2016 Law Lawyers of Distinction corporateINTL global award winner 2017