implications of a reverse merger

I am reading a 10k of a company, who went public last year as a result of a "reverse merger." Can anyone explain the mechanism behind a reverse merger? Does a company simply split into two? Also, the company ended up with $100 Million of cash due to the reverse merger. Does a company usually generate loads of cash as a result of the reverse merger?

Much appreciated,
Sunlounger

 
Best Response

The structure of a reverse merger is as follows: A non-operating public company, "the shell", acquires a private operating company, and forms a new company "newco". these shells are typically created for the purpose of doing a reverse merger although sometimes can be a dissolved company that maintains its filing requirements. Usually these shells are on the OTCBB however once the reverse merger is completed and if the newco meets the amex, nasdaq or nyse listing requirements they can switch to one of those markets. in many respects you can think of a reverse merger as public venture. the reason why the company had the cash is because usually when a company does a reverse merger they concurrently do a private investment in a public entity "PIPE". they reason why a company would choose to do a reverse merger varries; examples could be (1) its way cheeper than a traditional IPO (2) the company is too small to do a traditional IPO (3) there is less SEC scrutiny than in a traditional IPO (4) its a much faster process than a traditional IPO (5) its easier to raise money from groups when you are liquid (6) its an easy way for foreign companies (china, india) to get listed on the US exchanges; etc

 

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