Financing for Reverse Mergers

Generally speaking, financing is easier to obtain when a company goes public because investors are seeking an opportunity for liquidity. Although it is difficult to overstate the importance of financing as regards reverse mergers, about half of these mergers, in recent years, involve no financing whatsoever. This does not imply that there is no intention to seek financing at some point in the future, which again relates back to the fact that being public is an easier way to access capital. The financing itself can take the form of simple debt financings or factoring arrangements while others can be more traditional private placements, PIPEs or venture capital structures.

Little-known to those unstudied in reverse merger deals is the fact that if an investment bank or other source of money provides the shell company for the deal, they obtain an additional interest in the merged company. It is also customary practice to compensate the intermediary who introduces the shell company to the private company. For both of these reasons, banks and other sources of capital have an incentive to take part in reverse mergers, which can help attract the financing you need.

Although financing may be easier to come by, this is not to disregard the fact that all private companies should ask themselves why they want to go public, and the answer should never be to raise one round of financing. Going public for the sole purpose of raising only one round of financing without considering or seeking other benefit is almost always a flawed strategy. It should be standard practice to perform the concomitant analysis of whether that specific company can benefit from being public and bear the costs of doing so before going public. By not assessing this, you take on many risks including making the mistake of going public prematurely. Again, revisiting the pros and cons of going public through a reverse merger needs to be assessed before proceeding, despite the allure of future financing.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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