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What should I know about reverse mergers?

New Jersey businesses that are seeking capital have a variety of alternatives. A common way for these businesses to gain access to large financial sums - one that is gaining popularity in today's world - is an initial public offering (IPO). However, that might not be feasible for a smaller business. For them, reverse mergers might be preferable. Knowing what a reverse merger is and how it works is essential before taking the necessary steps with it.

A private company merging with a publicly traded shell company is known as a reverse merger. When this happens, the private company will become publicly traded through the merger with the shell company. The private company will retain its management scheme once it has merged. And the money that comes in via investors will provide shares in the new company, so there will be a way to exit the investment if they choose to do so.

There are potential positives and negatives when using a reverse merger. The private company will take on the shell company's obligations. Various reports must be filed as part of the process. This includes Securities and Exchange Commission reports and more. There must be quarterly statements filed three times every year. If people with inside information are selling or buying into the company, they must file specific forms with the SEC to avoid legal entanglements. Shell companies will have liabilities and this can be problematic for the private company. There must be due diligence because if the private company makes a mistake with the shell company and there is litigation or other problems, they will be responsible.

Any business deal can be confusing especially if there are several options to choose from. Deciding whether an IPO, a reverse merger or some other strategy is the best course of action often hinges on various legal issues and the long-term goals of the private business. Having a comprehensive corporate strategy is key. Advice from a legal professional who is experienced with assisting clients seeking a merger, a reverse merger or any other business maneuver is key.

Source: findlaw.com, "Reverse Merger: Small Business Funding Alternative to IPO," accessed on Sept. 12, 2017

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