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Bryan E. Kuhn
Counselor at Law, P.C.
Business & Employment Law Attorney

Why companies choose the reverse merger approach

On Behalf of | Jun 26, 2018 | Blog

A reverse merger may be a good idea for some Colorado companies that want to enter the public arena. This shorter and less expensive approach to going public is a popular alternative to the initial public offering approach. In the process, a company can hire an investment banking firm to oversee the underwriting process. The firm issues the shares for the company.

The bank plays multiple roles in the transaction. For example, it plays a pivotal role in generating interest in the stock, reviewing the transaction and overseeing the filing process. Banks also provide insight into the pricing of the stock to be issued.

The difference between the IPO and reverse merger process can be seen in the capital-raising process. This process of going public and raising capital for a company is combined during the IPO process. In a reverse merger, the majority of shares of a shell company are acquired and then combined with the private company. The private entity trades shares with the public shell in exchange for the shell company’s stock, making it an official public company. The IPO process comes with a different set of risks in that the company may or may not ever go public. In addition, it takes more time to complete an IPO. If the market conditions aren’t right, the IPO transaction can be canceled altogether.

A company may choose to go public for several reasons. For example, going public company can lead to better liquidity. In addition, more stock can be issued at any time through secondary offerings. If stocks are able to be issued at a pre-determined price, capital can be generated.

When considering a business sale and dissolution, the owner may want a lawyer to assist in the preparation. An attorney can develop exit strategies and any other business transactions when preparing a company to go public.

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