An “Alternative Public Offering” or a “reverse merger” is a method by which a private company goes public. A private company merges with a public company that typically has no assets or liabilities.
The publicly traded corporation is called a “public shell” since all that exists is its corporate structure. By merging into such an entity, a private company becomes public.
The private company merges into a public company and obtains the majority of its stock (usually 90% or more). The private company normally will change the name of the public corporation (often to its own name) and will appoint and elect its management and board of directors. The private company must have or be able to obtain audited financial statements for the past 2 years.
The advantages of public trading status include the possibility of commanding a higher price for a later offering of the company’s securities. Going public through a reverse merger allows a private company to go public—typically at a lesser cost and with less stock dilution than through an initial public offering (IPO).
In an IPO, the process of going public and raising capital is combined. In a reverse merger these two functions are unbundled—a company can go public without raising additional capital. Through this unbundling operation, the process of going public is simplified greatly.
The main advantages of an Alternative Public Offering include:
- Increase the Company’s ability to raise capital
- Expand the scope of the Investor Base
- Provides a liquidity path for your shareholders and creates the opportunity for greater diversification of shareholder wealth
- Private equity investors are difficult to attract as a private company
- A typical IPO is extremely difficult for smaller companies
- Typical small-cap IPO cost averages up to US $1-3 million in expenses and professional fees (plus commissions of the capital that is raised)—almost 4 times the typical cost of a reverse merger