The New York Law Blog: Benefits And Drawbacks Of A Reverse Merger For New York Businesses
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Thursday, October 27, 2016

Benefits And Drawbacks Of A Reverse Merger For New York Businesses

NY M&A Law, Reverse Merger
If you are looking to take your New York private business public, consider the benefits and drawbacks of a reverse merger.

Often, executives and owners of successful New York businesses may wish to capitalize on that success by making shares of the business’s stock available to the public. Having a public company provides additional benefits to businesses, including expansion of  business dealings and attracting highly talented hires with offers of stock options.

In a reverse merger, investors of a privately-held company acquire a majority of the shares of a publicly-held "shell company," which is then merged with the privately-held company. To consummate the deal, the private company trades shares with the public shell in exchange for the shell company's stock, transforming the acquiring private company into a public company.

An advantage of undertaking a reverse merger is the comparative ease of transitioning into a public company. Typically, shell companies are used by investment banks and financial institutions as vehicles to complete these types of deals because the shell companies are simply structured and can be registered with the SEC easily and inexpensively prior to the reverse merger. Also, acquiring a shell company is a way to work around the more conventional route of initial public offerings (IPOs), which may take several months to over a year to complete.

Another advantage of a reverse merger is that, generally, it gives the newly-merged public company greater liquidity and access to valued capital markets. This simplified process is favored because it allows New York business owners and executives to create a publicly-held company without having to raise capital.

A potential disadvantage to reverse mergers is that managers are often inexperienced in the additional regulatory and compliance requirements that comes with being a publicly-traded company. This can be significant because the initial effort to comply with the additional regulations and responsibilities may result in the company under-performing while managers devote time to administration over business operations. To alleviate this risk, newly-public companies sometimes turn to experienced investors familiar with the role of officers and directors of a public company. Another solution is to hire employees and consultants, such as attorneys and financial professionals with relevant experience, to bridge the compliance gap.

When considering a reverse merger, as with any merger and major acquisition, retaining the right attorney is key to ensuring that your company’s best interests are represented.
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*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.

Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.