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A Reverse Merger is an alternative method for a private company to become publicly traded. It is synonymous with an IPO (Initial Public Offering), but less expensive and quicker. Typically, a private company is merged into a public shell stock, with the owners of the private company obtaining control of the new combined public entity.

To better understand a Reverse Merger, the two methods of becoming a publicly traded company should be compared.

IPO (Initial Public Offering) – Traditional Process.
The traditional and most common method for taking a company public is called an Initial Public Offering or IPO for short. In this process, the private company utilizes the services of an Investment Banking firm to sell its stock to the public for the first time. This allows the private company to raise much needed capital to help grow its business. The Investment Banking firm collects a commission for proving this service. After the IPO has been completed, any individual can purchase the stock by placing an order through a stock brokerage firm. There are some drawbacks with completing an IPO via this traditional method. It can be very expensive. The cost for legal and accounting fees, underwriter fees, marketing fees, printing fees, and various other fees can cost several million dollars. This process can also be also very time consuming, taking anywhere from months to years to complete. One other difficulty in completing an IPO involves the Investment Banking firm that is doing the underwriting. They may decide when the private company goes public, how much money they raise, and may even make “suggestions” to the private company owners on how to run their business, thus causing them to loose some control over “their” company.

Reverse Merger – Alternative Process.
The alternative process of becoming a publicly traded company is called a Reverse Merger. In this non-traditional method, the owners of the private company purchase a Shell Stock. Note that one significant difference between an IPO and a Reverse Merger is that when completing a Reverse Merger and becoming publicly traded, the private company has yet to receive any capital to expand their business. Usually, after the Reverse Merger is completed, the company raises the needed capital by selling restricted stock to a pre-arranged list of investors (sometimes referred to as a PIPE – Private Investment in Public Equity). The cost of purchasing a Shell Stock is much less expensive than completing a traditional IPO. Depending on the type of Shell Stock purchased, the cost can range from $50,000 - $1,000,000 for 70% to 95% of the outstanding stock. The time to complete a Reverse Merger may happen in a fraction of the time to complete an IPO, sometimes taking only 2 - 4 months. One other factor that makes a Reverse Merger an attractive means of going public is that the owners of the private company retain the entire decision making in the process.