The company spent most of its management attention trying to raise funds to pay bills and grow the company. It had raised funds from friends and family and from their friends and family. It split the company and registered to franchise in many states. With sale of shares and franchise fees there was still not enough money for the company. One of the company's financial advisors recommended a reverse merger.
In a reverse merger the active company with assets merges into a publicly traded shell that is inactive and has very few if any assets. As a publicly traded company, the private share holders of the company gain liquidity for their holdings as they can buy and sell their shares in the stock market. It is also easier to raise funds as a public company because you can issue and sell shares to a larger investor pool. Doing a reverse merger also saved us lots of money versus taking the company public via an IPO and registering with the Securities and Exchange Commission. It saved lots of time versus how long the process normally takes.
Reverse mergers are also prime space for scams. The fact that a company is listed on an exchange does not mean that the company is financially stable or is even viable. Many investors are cheated out of their money by investing in the publicly traded result of a reverse merger that is created just to scam them. According to Herb Greenberg of The Wall Street Journal this has been especially true in China in the past few years.
If you invest in one of these reverse mergers do your home work and be aware that in the best of circumstances this can be a very risky.
And the same advice goes for investing in reverse mergers, I assume.
Theoretically, you could take the proceeds generated from doing a reverse mortgage deal and invest them in a reverse merger.
Posted by: Bob Hansell | September 25, 2006 8:01 PM | Permalink to Comment