Hamilton & Associates l Reverse Merger Due Diligence
Traditionally, private companies become publicly traded by registering an offering under the Securities Act of 1933, as amended. Reverse Mergers involve backdoor going public transactions that are often plagued with bad actors. Many reverse merger companies have dodgy histories and undisclosed liabilities that taint the public vehicle for years. Additionally, the general perception in the securities industry among regulators is that Reverse Mergers are used as vehicles for fraud either by stock promoters or others including securities lawyers who manufacture them.
It is critical that any company considering a reverse merger transaction have competent representation from a securties attorney who does not sell public shell companies to their clients. Many securities attorneys wear two hats. One as a lawyer and the other as a shell broker. At Hamilton and Associates we act only as securities lawyers protecting the interest of our clients.
Despite success stories touted by shell brokers, reverse mergers involve a significant amount of legal and compliance risk. Additionally, failure to conduct proper due diligence and/or if the Reverse Merger transaction is not properly structured, the post Reverse Merger Company can end up to be a private company with public company reporting requirements and expenses. In addition to the traditional Reverse Merger risks including SEC investigations or violations, undisclosed liabilities, litigation and potential litigation, companies now face increased compliance costs and regulations. Hamilton & Associates has extensive experience in conducting due diligence of reverse merger transactions and public shells. The firm has analyzed hundreds of public companies and identified numerous hijacked reverse merger companies.
The Myths of Reverse Mergers
There are many misconceptions about Reverse Mergers that shell brokers use to entice private companies into purchasing a public shell company including but not limited to those set forth below.
Reverse Mergers are Inexpensive and Fast.
Stock promoters often compare the price of an initial public offering (“IPO”) with that of a Reverse Merger. This is misleading because with an IPO, a company pays an underwriter to sell securities to the public and develop an active market after the company becomes public. A Reverse Merger is not a capital raising transaction. A private company can go public and file their own Registration Statement less than the cost of a reverse merger transaction. In addition to the time it takes to perform due diligence, negotiate the Reverse Merger agreement, and close the Reverse Merger, recent SEC and FINRA requirements eliminate the timeliness benefit of the Reverse Merger.
Failure to comply with these requirements can create additional costs for the post reverse merger entity and even result in a loss of ticker symbol or SEC Enforcement action.
In 2005, new rules were adopted that require former Shell Companies to file “Form 10 Information” with the SEC within four business days after the completion of a Reverse Merger. This information is substantially equivalent to that found in a Form 10 or SEC registration statement and requires comprehensive disclosure of the company’s business plan, risk factors, financial condition, management, properties, and audited financial statements. Companies not prepared to prepare these disclosures can result in the Company becoming a delinquent SEC filer. Hamilton & Associates can guide your company through the preparation of these disclosures and help you determine if a reverse merger is the right going public method for your company.
Any private company seeking to have its securities publicly traded should proceed with caution when considering whether to engage in a Reverse Merger. In light of these considerations, private companies should consult a qualified and independent securities attorney to perform thorough research and due diligence before engaging in a Reverse Merger.