Reverse Merger Into a Cash Shell

Going Public Through a Reverse Merger Transaction

Drawing on our knowledge, experience and expertise, Swordblade & Co will help you complete your reverse merger smoothly. While we are strong advocates of direct listing as the way for small caps to go public, we can guide you to a successful reverse merger if that is your preferred way of entering a market.

What is a Reverse Merger Into a Cash Shell?

Drawing on our knowledge, experience and expertise, Swordblade & Co will help you complete your reverse merger smoothly. While we are strong advocates of direct listing as the way for small caps to go public, we can guide you to a successful reverse merger if that is your preferred way of entering a market.

A reverse merger enables a private company to go public without the costly and time-consuming traditional IPO (Initial Public Offering) process. During the merger (also known as a reverse IPO) the private company acquires or takes control of a larger, already publicly-trading company with the aim of itself going public. Usually, the public entity has little or no operating business and is referred to as a “shell” company. What it does have is a stock market listing, a board of directors and maybe some cash in the bank.

When the private company “reverse merges” into the public company, the two become an entirely new operating business. The shell company no longer exists. Generally, the newly merged company changes name to reflect its business.

Reverse mergers are attractive for several reasons. The private company gains admission to a stock market and access to cash inside the shell which it can use to grow the business. And the process is less complicated and less expensive than floating via an IPO. There’s no need to hire an investment bank to underwrite and issue shares nor is there a long due diligence process or the complex administrative and regulatory filing procedures.

Floating via a reverse takeover can also be quicker than a traditional IPO, but that will depend on how quickly terms can be agreed with the owners of the shell company.

How Does The Reverse Merger Process Work When You Engage Swordblade & Co?

In a reverse merger, the private company’s shareholders purchase enough shares of the public company to seize control and merge the two entities. Once the merger is complete, the shell company no longer exists.

Our capital market experts can support and guide you with planning, implementing and managing the entire reverse merger process. We act as project managers, organising resources and assembling a team of leading professionals to complete a reverse merger transaction successfully.

Step 1: We will work with you to engage the services of a cash shell adviser, someone who will undertake research to identify the most suitable cash shells that match your company’s requirements. You can’t merge with any old shell company. The adviser will draw up a shortlist of suitable shells for you to study and weigh up the pros and cons of each one.

Step 2: Once you have made your selection, the next step is to approach the shell company and see if there is any interest. If so, you and the adviser will enter a series of discussions with the cash shell company and its advisers. They will want to discuss your business and the benefits you can bring. It’s important that they feel comfortable with your company and confident in your growth projections for the future.

Step 3: Assuming the discussions go well, you will start to prepare for the transaction. The first thing you’ll need to do is assemble a team of advisers who will represent you. We can advise and guide you in selecting your lawyers, accountants and tax experts.

Step 4: Setting up a timetable for the transaction and agreeing to its terms. This will include getting a valuation of your company, deciding how many shares/cash will be offered and agreeing who will sit on the new entity’s board and in what roles.

Step 5: Once the terms of the transaction have been agreed the shell will seek approval from its shareholders to acquire your company. Financial and legal due diligence tasks will be undertaken on your business, and work starts on the admission document that is submitted to a stock market. After these tasks have been completed, the readmission document is submitted to a stock market. Once approved, the transaction is finalised.

Upon completion of the transaction, the former shareholders of the private company will own a majority of shares in the new public entity.

Advantages Of Reverse Mergers

There are several reasons why companies consider reverse mergers instead of an IPO. Among the key advantages are:
Speed – while a reverse merger still requires research, preparation and due diligence, the process can be quicker than a traditional floatation. No underwriting is required which saves a lot of time and the private company is not subject to the same regulatory scrutiny that’s required for a conventional IPO. In some cases, reverse mergers can be completed in a matter of weeks.

Lower costs than a traditional IPO – going public with an IPO is very expensive. Each step costs a lot of money and underwriters charge hefty fees of between 3% and 7% of the proceeds. If investment banks are engaged to help with a reverse merger they only take an advisory fee.

Less Risk – the IPO route doesn’t come with a guarantee that the private company will go public. They may scrap their listing in response to volatile market conditions or unfavourable publicity. All the time and money invested in preparing for the floatation will be wasted. Reverse mergers are not as dependent on market conditions as IPOs.

Certainty of Cash – the private company will acquire the cash shell’s assets including its cash reserves. By contrast companies floating via an IPO have no guarantees. They may put in a lot of work and spend a considerable amount on advisory and legal fees yet may not secure the funding they need by the time they list.

Disadvantages of Reverse Mergers

While a reverse merger looks an attractive proposition at first glance, there are several potential drawbacks.

Hidden Liabilities – shell companies may come with a history of problems that are unknown to you. They may have hidden liabilities such as debts and lawsuits. If they’re not discovered before the merger they could cause problems further down the line. It will be the responsibility of the private company to take on any liability.

Fraud Risk – the practice of reverse mergers has been abused by some public shells that are not legitimate, money-making enterprises or are abandoned companies that weren’t delisted from a stock exchange.

Managing Shareholder Expectations – the new company will include existing shareholders who may be unfamiliar with the private company’s business model how and it operates. Those who are risk-adverse may decide to offload their shares right after the merger. This could result in short-term share price volatility.

How Much Does A Reverse Merger Cost?

Reverse mergers are not cheap. There are upfront transaction costs, compliance costs and a host of other expenses such as the contingent liabilities associated with the public shell company. The final bill can run into the many hundreds of thousands of pounds and could be three or four times as much as the price of a direct listing.

Reverse Mergers At A Glance

Next Steps

If your company is planning to go public and raise funds on the capital markets, we look forward to hearing from you.

The easiest way to get started is to request a free evaluation. By providing minimal information about your company and capital needs, we will be able to provide you with a quick assessment by email. In most cases we can tell you if your business is ready to go public, or not yet.

We’ll also let you know if we think that Swordblade & Co are a good fit for your flotation plans, and anything else that we may think can help you.

Alternatively, if you are ready to talk in depth about floating your company, we recommend you arrange a paid consultation with one of our partners. It can usually be scheduled within a few days and is the fastest way to get detailed advice.