Reverse Merger Compliance & Disclosure Requirements: SEC Compliance Basics

In a prior article, we discussed the basics of Reverse Mergers (also referred to as reverse takeover “RTO,” reverse IPO, or a backdoor listing). And as mentioned in this post, in a reverse merger investors, typically, of a privately-held company acquire a majority of the shares of a publicly-held company, which is then merged with the privately-held company. The basics of a RTO was explained in the article above. This post details the SEC compliance basics after the execution of the reverse merger.

Reverse Merger

Reverse Merger Disclosure Risk Factors

The U.S. Securities & Exchange Commission (“SEC”) requires the surviving reverse merged company to disclose the following to the SEC/potential shareholders:

  1. Specific risks to the business of the surviving company;
  2. Management’s experience in operating a public company;
  3. Risk of investing in the surviving company;
  4. Report by an independent auditor; and
  5. History of compliance with the U.S. laws and regulations.

Reverse Merger Disclosures Under Form 8-K

A reverse merger that utilized a shell company triggers the requirement to file a Form 8-K within four days of the closing of the reverse merger. The Form 8-K must contain all information required by Form 10 (“Super 8-K”) under the Securities Exchange Act of 1934 (“Exchange Act”). Form 10 disclosure includes, among other items:

  1. Specific description of the business;
  2. Risk factors;
  3. Specific information on directors and officers;
  4. Financial information required by Item 3017, Item 3038, and Item 3059 of Regulation S-K;
  5. Specifics of the transaction;
  6. Material terms of pertinent contracts with the surviving reverse merged company in which directors, officers of interested parties are a party;
  7. Certain financial statements;
  8. Compensation of executives; and
  9. Applicable government regulations specified to be disclosed because of the nature of the company.

Non-compliance with the disclosure requirements and applicable law may lead to fines, criminal sanctions, suspension of trading and revocation of the registration of the company.

As noted at Reverse Mergers in New York, the surviving reverse merger company must hire competent and experienced consultants. Have a proactive attorney on board and have this attorney work with financial professionals. Often proactive advisors go a long way in mitigating compliance risks.

If you are interested in more information on Reverse Mergers (Reverse Takeover “RTOs,” Reverse IPOs, Back Door Listing), please: Schedule a call with an Attorney.

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