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Reverse Mergers

Whether you are weighing the risks/benefits involved with an upcoming reverse merger or navigating the complex accounting regulations that follow as a result of one, GBH can help.

A reverse merger is a method by which a private company goes public. The merger of a private operating company into a non-operating public shell corporation with nominal net assets typically results in the owners and management of the private company having actual or effective operating control of the combined company after the transaction, with shareholders of the former public shell continuing only as passive investors. These transactions are considered to be capital transactions in substance, rather than business combinations. That is, the transaction is equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation, accompanied by a recapitalization. The accounting is identical to that resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded.

Merge With Ease

The post reverse merger comparative historical financial statements furnished for the “legal acquirer” should be those of the “legal acquiree” (i.e., the “accounting acquirer”), with appropriate footnote disclosure concerning the change in the capital structure effected at the acquisition date. Ordinarily, the guidance of ASC 805 is applied in the allocation of the purchase price to all of the assets and liabilities of the accounting acquiree.

The Form 8-K reporting the acquisition should contain financial statements of the accounting acquirer (the legal acquiree). Those financial statements thereafter become the financial statements of the registrant pursuant to GAAP.

The private company which has gone public seek the benefits of public trading of its securities:

  • Increased liquidity of the ownership shares of the company.
  • Higher share price and thus higher company valuation.
  • Greater access to the capital markets through the possibilities of a future stock offering.
  • The ability of the company to make acquisitions of other companies using the company’s stock.
  • The ability to use stock incentive plans to attract and retain key employees.
  • Going public can be part of a retirement strategy for business owners.