Monday, June 6, 2011

Reverse Mergers: Beware of Foreign Entities

With the venture capital market strengthening and IPOs making a mild resurgence, companies are re-visiting using reverse mergers as a way to go public. In an article entitled, SEC Cracking Down on Foreign Shell Companies (David M. Katz, CFO.com), I read the following excerpt, "Broadly speaking, a reverse merger refers to a private operating company's acquisition by a public shell company. Reverse mergers typically result in the owners and management of the private company having voting and operating control of the combined company. In effect, the private company becomes an SEC reporting company with registered securities without having to file a registration statement." I couldn't give a better definition so I didn't. I let CFO.com (CFO magazine) do the work!

Reverse mergers are a viable way to go public. If you are looking for a way to raise capital and/or access the public markets, consider this method. I'll write more on the topic of reverse mergers later. For now, if you are seriously considering one and have a target identified, pay close attention to anything that seems out of kilter that could trigger the suspicion of the SEC, especially if you or the entity you are acquiring is a foreign shell company. The SEC is culling 8-K reports and checking to see that auditors are doing their homework. If the 8-Ks show an auditor resignation, the SEC is now delving more deeply. (i.e., If the auditor resigned soon after the reverse merger was completed, why did this occur? Do they not stand by their numbers and not wish to be associated with those numbers going forward?)

For all of you who don't have a clue as to what I'm talking about, skip this post.



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