REVERSE MERGERS EXPLAINED

A reverse merger is an alternative method to go public6. According to the NYSE, a
company to be listed is expected to meet certain qualifications and to be willing to
keep the investing public informed on the progress of its affairs. The company must
be an on going concern, or be the successor to a going concern7. The essence of the
reverse merger is to make a privately held company (privco) the successor of a
previously going concern public company (pubco). This goal is achieved through a
stock swap in which privco is acquired by pubco, but privco’s shareholders obtain
control over pubco. In addition, privco’s shareholders can change the name of pubco
and remove its board of directors. In the next section we explain with a real example
the typical reverse merger operation.

Public companies that get involved in a reverse merger can be of two types: defunct
or shell companies. A defunct company is a company that went public via IPO but
for some reason is already out of its market and therefore is an inactive company.
Some of them are in fact in bankruptcy. These companies are not involved in real
activities any more, although they used to have operations. They just preserve their
corporate structure, are still listed and some times are trading companies. A shell
company is a company registered at the Securities and Exchange Commission under
the 1934 Exchange Act. The main characteristic that differentiates this kind of
company from a defunct company is that a shell company has been founded with the
main objective to serve as a going public vehicle, through a merger with a privately
held corporation. These companies are commonly called SPAC, or Special Purpose Acquisition Corporation and usually are non-trading companies. In addition,
because of its special purpose, this kind of company lacks a history of real
operations, employees or assets. Therefore, in general, it is safer to do a reverse
merger with a shell company than with a defunct company because of the potential
liabilities that a company with previous operations may have.