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What are reverse mergers and how can they benefit MI businesses?

When a Michigan business is considering its options to expand or go public, there are numerous potential methods to move forward that might come to mind. A merger is one. However, it might not serve the business goals to go through a conventional merger. Instead, the corporate strategy might be better-served to consider reverse mergers. Understanding what these are, how they work and the benefits can help to decide if it is the right choice.

A reverse merger occurs when a company that is privately held acquires what is known as a "shell company." This shell company is publicly traded but frequently inactive. By completing this merger, the privately held company will suddenly become publicly traded. This is often preferable for a company that is established and has a known customer base with commensurate income. If it is able to move seamlessly into the Securities and Exchange Commission's requirements, it is better for that company.

An inactive company that is publicly traded but still in business is often simply waiting to be part of a reverse merger. This company is unlikely to be listed on any of the larger and better known exchanges, but will be on a lower-level exchange. There are numerous regulations that have to be navigated with a reverse merger and there will eventually be a filing of a Form 8-K from the SEC to disclose the transaction. It will include the possible new company name, how the restructuring will be handled and there will potentially be an influx of capital from investors.

A reverse merger is beneficial as it allows a company to go public without having to wait the amount of time it would were it to do so via an initial public offering. Then it will be more prone to have investors willing to put money into it, allowing it to grow more quickly. Companies that are interested in these types of mergers need to make certain that they are following all the applicable laws and doing so in the way that will best benefit their company. Needless to say, something this complex should be discussed with an experienced attorney who knows the ins and outs of corporate dealings and can provide advice on how best to proceed with reverse mergers and if it is a good idea for the particular company.

Source: Entrepreneur, "A First Take on Reverse Mergers," Ameen Khwaja, accessed on March 22, 2016

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