Reverse mergers have quickly surpassed IPO’s as the method of choice for going public. Simply defined, in a reverse merger the private company acquires a publicly traded shell, merges into it, and the private company (now public) continues on as the successor entity. In order to ensure a smooth merger, it is essential that the public shell being acquired has no assets or operations prior to, or at the time of, the reverse merger.

The private company merges into the public shell and obtains the majority of its outstanding stock (at least 90%). The post-merger collective entity then changes its name to that of the private company. A new trading symbol is then applied for with NASDAQ.

For reporting entities, an information statement, called an 8-K, must be filed within 4 days of the closing. The 8-K describes the newly combined company, stock issued, information of new officers and directors, a full description of the business, and financial statements audited to US GAAP standards. The 8-K must disclose the same type of information that it would be required to provide in registering a class of securities under the Securities Exchange Act of 1934.

Public Shells

The public shell, whether it is a Bulletin Board Shell or a Pink Sheet Shell, should possess certain qualities and structural characteristics;

• The public shell should be a bonafide shell, meaning that it was not created solely for the purpose of being sold off as a public shell
• The shell should be free of debts and obligations
• The shell should possess a documented history of ownership; all control persons from present back to inception should be verifiable
• There should be no past or pending state or federal regulatory problems, civil suits or shareholder grievances
• The shell should possess a flexible share structure and should require little, if no modifications prior to the merger; there should be sufficient authorized and unissued common stock as well as preferred series stock
• At least three market makers should be quoting the shell
• The percentage of deliverability should be high; at least 90% of the outstanding shares should be deliverable to the successor company
• Delaware corporations are most preferable