The simple definition is as follows:A reverse merger is the acquisition of a public company by a private company, allowing the private company to bypass the usually lengthy and complex process of an Initial Public Offering (IPO). It is commonly referred to as a Reverse Take Over (RTO)
Public companies, those trading on some exchange, will sometimes go out of business. Naturally, the reasons for this are numerous, but when such a company literally ceases to function it becomes an empty or inactive shell. The stock for this shell is still listed on some exchange, but since the company has essentially failed there is no active trading in the stock.
These shells can be purchased and reactivated by inserting a private company into the shell. The new entity will then change the name of the shell and apply for an appropriate trading symbol. Once issued the private company is now a publicly traded company. The use of the RTO bypasses the lengthy and complex process of a conventional IPO.
WHAT ARE THE BENEFITS OF A REVERSE MERGER
An RTO is substantially less expensive than a conventional IPO. A conventional IPO generally runs about five million dollars. A basic RTO can cost as little as one hundred and fifty thousand dollars. At that price it is a bare bones transaction. A well executed RTO with quality professionals providing legal; accounting and investor relations would be in the area of one million dollars. Almost without exception the primary purpose of doing an IPO is to raise capital. An RTO can be done with or without the need to do a capital raise.
An RTO is not as sensitive to market conditions and are always within the control of the private company management. A conventional IPO must be underwritten. An underwriter is a brokerage firm, investment bank or the lead bank in a group of banks that are underwriting the issuance of a company’s stock.
In a conventional IPO the underwriter assumes a very large risk. As part of the underwriting the underwriter has agreed to acquire the company stock for a wholesale price. When the stock is resold to retail buyers or institutional investors the underwriter makes a profit, the difference between the wholesale and retail price, on the sale of the stock. Because of this inherent liability on the part of the underwriter he controls the IPO. On numerous occasions a company has spent millions on preparing to execute an IPO and then at the last minute, due to market conditions or problems within the company’s specific industry, the underwriter delays or withdraws from the IPO altogether. Needless to say this is disastrous for the company in question. An RTO transaction is not subject to this particular hazard. An RTO can be completed in a very short span of time. Very basic transactions can be done in as little as 30 days. More typically the process takes from eight to twelve weeks. When compared to a conventional IPO the time difference is substantial.
A potential benefit is a tax loss carry forward. Since the prior operators of the shell have not been successful it is possible that the shell will have tax deductions that can be carried forward and applied against the revenue of the new operators of the shell.
One very important aspect of an RTO is the financing options that are available once a company is public. An RTO provides:
Publicly traded stock can be used to attract quality management. Generally, when a company hires a senior executive part of the compensation includes stock options. Stock options on a liquid, publicly traded stock is deemed more valuable than an option on privately held stock that lacks liquidity.
Publicly traded stock also provides early investors with an exit strategy. Most investors are more comfortable if they can exit an investment at will.
An RTO is currently the norm and conventional IPO’s have become the exception. There is an average of two hundred and fifty seven RTO’s each year as compared with approximately thirty IPO’s.
Notable companies that have used an RTO to go public:
To our knowledge, Linear Capital Partners is the ONLY company that pays for all of the expenses associated with the RTO. This includes, but is not limited to, legal, accounting, acquisition of the shell and investor relations services.
Linear Capital Partners has participated in approximately 80 RTO transactions. We are considered experts in the field and one of the premier providers of the services associated with this process.