What is a reverse merger shell?

What is a shell company?

In business, a ‘shell’ is a name used to refer to a company that is public although it does not have an operating business at the moment. Such companies usually have a product that has potential to be sold and generate income although pressing issues have seen the company terminate its operations. A shell company can have active shareholders and even be listed on the exchange. Shell companies can have significant assets and capital but in extreme cases, they may have no assets. They are either companies that have existed for many years or a new company seeking to start operations.

Defining a Reverse Merger?

In business terms, a reverse merger is a term that describes the process of making a private company public in simple terms. It occurs when a private company takes over the controlling interests of a public listed company, allowing the private company to merge with a shell public company. Reverse mergers ensure that the private company changes into a public company with only the public company surviving.

During a reverse merger, the companies must comply with the following SEC rules once the reverse merger is complete:

  • Change of the ‘shell’ company’s name: Once the reverse merger is completed, the ‘shell’ company takes over the name of the private company.
  • Changes to the ‘shell’ company’s trading symbol: In case the public ‘shell’ company has a trading symbol, it is modified once the reverse merger is complete to reflect its name change.
  • A reverse stock split might be affected and the issuance of additional shares. This aims at ensuring that the new shareholders have a stronger control of the company.
  • Filling and filing of the 8-k forms: The 8-k forms have all the necessary information concerning the merger including stocks issues, financial statements as audited per the US GAAP standards, and information on new directors and officers.
  • Directors of the ‘shell’ company and the officers resign and new directors and officers are sworn in.

How to prepare for a reverse merge shell

Here are some of the steps involved when preparing for a shell reverse merger.

  • Identify an appropriate public shell: Identifying a suitable ‘shell’ for shell reverse merger can be stressing. As such, you should consider inquiring from attorneys who specialize in reverse mergers for recommendations. You can also consult with companies or individuals who deal with ‘shell’ companies for recommendations.

 

  • Choose a clean ‘shell’: You should do a background research on the shell company to ensure that it has no hidden debts or liens. You can hire research firms that specialize in finding out whether companies have hidden liens. To be safe, ensure that the Stock Purchase Agreement has a clause that indemnifies the buyers and the shell against debts within the first 12 months of purchase.

 

  • Conduct a financial audit of your private company: Public companies that report and trade on the OTCBB will require private companies to avail their latest audited financial statements before negotiating for any merger.

 

  • If a shell company is classified as ‘deal driven’, you should proceed with caution. Many ‘deal-driven’ shell companies will require you to meet certain extra conditions, especially if the principals of such a company need to retain stock after the merger.

The Benefits of going public through shell reverse mergers

Some of the benefits of converting a private company to a public company through a ‘shell’ are:

  • Little legal work: When compared with an IPO, a shell reverse merger comes with few legal regulations that need to be met.

 

  • It takes a short time: An initial public offering (IPO) for a private company takes about 6 months to 12 months for a public offering. This is too much time compared to the one or two months it would take to complete a shell reverse merger.

 

  • It allows growth through acquisitions: Going public will ensure that a private company can make acquisitions through stock, cash, hard money loans, or all of the above. This will provide room for rapid expansion of the company.

 

  • The offering of stock incentives becomes possible: Public companies can offer management incentives in the form of stock bonuses to their employees. This can be a source of motivation for employees and can be used to lure competent personnel to the company.

 

  • A reverse merger makes it easy for the company to convert debt into equity: As a public company, it becomes easy to convert debt into equity in the form of shares.