Reverse Merger Benefits

There are a number of benefits to going public via a reverse merger.  We have subdivided these into three particular categories to enable you to classify based on your desires or sticking points below:

• Reverse Merger vs. IPO

• Reverse Merger vs. Remaining a Private Company

• Capital Raising Benefits

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Benefits vs. IPO

Speed of Execution: From start to finish a reverse merger may be completed within 45 days (including all legal documentation and financing - if PIPE financing is executed simultaneously).  A standard IPO typically take anywhere from 6 to 9 months at minimum to be completed.

Costs: The costs associated with a reverse merger (typically anywhere from $100,000 to $750,000) are on average a fraction of the costs associated with an IPO, not including commissions and underwriters fee.

Management Time / Energy: Traditional IPOs generally require greater significant attention and time commitments from senior management.  During a traditional IPO management is often required to do a full road show (which could last anywhere from three to nine weeks) along with be highly involved in the drafting of all documentation and marketing materials prior to the road show.

Legal Work / Liability: The legal work required and potential liabilities / complications associated with an IPO are much greater then the reverse merger process.  This is mostly due to an IPO being more complicated and the length of time that it takes to complete.

Uncertainty of IPO Success: The success of an IPO's are often highly market driven. If the market turns sour during the marketing process then the IPO may have to be pulled from the market which can put a taint on the perception of the Company and also be very expensive and time consuming on management to have to restart the process or not receive the valuation the Company deserves during pricing.

Upfront Dilution Potentially Minimized: During a reverse merger the existing owners of the business have a increased control on reducing upfront dilution during a reverse merger versus an IPO - often IPO's are required to be an minimize size for underwriters to take it on and work with the company to make it worth their time and effort.

Underwriter Requirements:  No underwriter is needed during a reverse merger, reducing the need for a company to spend time interviewing / meeting with investment banks

Business History or Development Stage: Any stage or size of Company can go public through a reverse merger.  That being said often the shell providers will charge a much greater amount in the terms of equity and cash for less exciting, developed or accomplished businesses than they would for a company with higher economic value.
 

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Benefits vs. Remaining Private Company

Higher Valuation: Publicly traded companies often are valued at much higher multiples than private companies.  The rationale is mostly due to the factors listed below, ranging from liquidity of investment, increased information flow and overall currency and ability to grow at a faster rate

Liquidity: Liquidity is a major component of being a public entity.  Being a public company means that there is a public marketplace where buyers and sellers can meet to sell shares in the company and buy shares in the company.  Liquidity is a big reason why public companies are often valued at much higher valuations than private companies.

Acquisitions: Having the currency, valuation and prestige of being a public company is very valuable when looking to make an acquisition to grow the business.  Public companies are often perceived to be more stable / successful companies in the marketplace. 

Employee Incentives: Employee Stock Option Plans (ESOP Plan), Management incentives programs, stock bonuses / options,  and overall prestige of working for a company are a number of reason why a company can benefit from being public.

Prestige: Being a public company means that the company will be much more visible to business partners, investors, rankings / league tables, etc.  Overall, it is often viewed to be very prestigious, to work at, or own a public company.

Growth: Utilizing the currency of being a public company enables a company to grow faster and with less dilution either through acquisitions or organic growth.

Exit: Existing owners may utilize a simultaneous PIPE and reverse merger to take capital out of the business at closing or utilize the public markets to sell shares over time.  Overall exiting an ownership position with out a question much faster and easier through a public entity.

Foreign Companies: Foreign companies (especially Chinese companies) have been very active in the reverse merger marketplace.  Reverse Mergers enable Companies to gain access to foreign capital quickly and efficeintly.

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Capital Raising Benefits

Structuring Flexibility: Reverse Mergers are much more flexible in the terms of raising capital vs. IPOs.  Companies raising capital simultaneous with a reverse merger can typically sell less equity upfront, use convertible structure deals to get the capital raised, and also structure it in the form of debt and equity.  Often Companies that are not as developed are able to raise capital through a PIPE and reverse merger, when they may not have been able to get a traditional IPO completed.

Capital Formation: Raising capital while being public is typically much easier and quicker to get completed because of the added liquidity for the investors, information available to the public and the legal protections provided to public investors.

Pre Public Rounds: Often while in the process of going public through a reverse merger, companies are able to get a private equity round completed due to the fact that the investor will have an exit plan and opportunity to have liquidity in the near future.

PIPEs: PIPEs are becoming a very credible, fast and effective form of financing for public companies.  PIPEs can be sourced, negotiated and closed simultaneous with a reverse merger. They can also be repeated throughout the growth of the Company to bring in capital at higher prices as the Company performs.  When  choosing a financing partner to raise capital from during the PIPE process be very cautious and look for a partner that is more long-term focused and looking to help grow the business while being tied to overall shareholder value.

Debt Facilities: Many debt providers find the reporting requirements and the level of equity usually coming into the Company mitigates some of the risk taken by the debt providers due to their lien and  position in the capital structure.

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