The term Reverse Merger refers to a transaction whereby a private company seeks public listing and becomes a publicly traded company. The private company shareholders gain control of the public company by merging it in with their private company. The private company shareholders receive the majority of the shares of the public company (normally 85% to 95%) and the original public shareholders retain the remaining shares. Once the merger is consummated, the post-merger, combined entity changes its name to that of the private company, and appoints and elects key officers and directors at the discretion of the private company's shareholders.


The transaction can be accomplished in an expeditious and cost-effective manner. The transaction does not go through a review process with state and federal regulators because the public company has already completed the process.


Optimally, the public entity has limited assets, liabilities or operations prior to, or concurrent with the merger that is why it is called a shell. If the shell company is listed on the Bulletin board, the registered or "free trade" shares can continue to trade the new company can do a private placement immediately. However, to trade the new shares of the combined public company it must first register the shares with the SEC.


The advantages of public trading status notably include the possibility of a greater likelihood of capital formation. Relative to a private enterprise, a public company is potentially more successful in attracting potential investors and investment banking firms for the purposes of raising additional funds. Going public through a reverse merger allows a private company to go public relatively quickly, at a substantially lesser cost.


The benefits of going public through a reverse merger, as opposed to the traditional IPO process, include the following:
• The costs are significantly less than the costs required for an initial public offering
• The time frame requisite to securing public listing is considerably less than that for an IPO
• No underwriter is needed: (a significant factor to consider given the difficulty companies face in attracting an investment banking firm to commit to an offering)