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San Diego Real Estate Attorney

Going Public in Reverse -- A Strategy for Today's Market
By Gordon Kaplan

With the initial public offering (IPO) market virtually closed to emerging companies these days, and likely to remain closed for some time, a growing number of rising companies have found that going public through reverse takeover of a public shell (RTO) is a viable alternative to an IPO. Would an RTO work for your company?

The Basics of an RTO and its Advantages

In an RTO, a private company goes public by merging into a public company that is typically dormant with no significant assets or operations (a public shell). Key to an RTO is finding a shell with suitable public status: It should be a full "reporting company" that files annual and other periodic reports with the Securities and Exchange Commission, and its shares must be quoted for public trading on an exchange or over-the-counter market such as the Nasdaq SmallCap Market or the OTC Bulletin Board.

For an RTO, the merger with the shell is structured so that the owners of the private company receive a controlling block (usually 80 percent to 95 percent) of the public company's shares. The private company is extinguished in the merger but the public company survives and carries on the private company's operating business. The RTO is complete when the new controlling shareholders of the public company appoint a new board of directors and install new management.

Once the RTO is completed, the new owners of the public company are set to reap the main advantages:

Valuation: The market valuation of a publicly traded company is often substantially higher than that of a similar private company in the same industry.

Raising Capital: While an RTO does not itself raise fresh capital, it does provide the post-merger public company with enhanced access to capital markets through the possibility of future private placements or registered secondary offerings, all at potentially higher valuations and with less dilution to shareholders than otherwise.

Acquisitions: The post-merger public company may be able to use its publicly traded stock as currency for mergers and acquisitions.

Stock Incentives: The public company can use a streamlined process to register its stock (Form S-8 stock) for incentive plans to attract and hold key employees and compensate consultants and advisers.

Liquidity: An RTO should eventually provide more liquidity for shareholders through development of the publicly traded market for their shares, particularly if the company has a growing business that is able to attract a following among stock analysts, market makers and institutional investors.

Preparing for an RTO

In an RTO, the owners of the private company inherit the history of the public company including its debts, lawsuits, legal and regulatory problems, and all other existing and potential liabilities. The owners of the private company must therefore be careful about what they are walking into and exercise due diligence. Their watchword should be: "Trust ... but verify."

In preparing for an RTO, a private company must also ensure that its own house is in order and that its capital structure, corporate charter and bylaws are adequate for the merger. Owners and managers must also be prepared to meet the extensive accounting, public reporting, disclosure and corporate governance obligations of a public company.

But of overriding importance for a private company contemplating an RTO, it must have an operating business with strong profit and growth potential, and a comprehensive business plan to realize that potential. For an emerging company able to meet these tests, going public "in reverse" can be a timely and effective strategy in today's market.

San Diego Real Estate Attorney Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult a attorney for individual advice regarding your own situation. Attorney representation in the following practice areas: Real Estate Law, Personal Injury, Estate Planning, Employment law, Bankruptcy, and Business law.