Equity Sponsorship

Reverse Mergers

A reverse merger (also known as a reverse takeover or back door Initial Public Offering (IPO) is a path for private companies to go public through a "simplified" and less expensive regulatory registration process. A conventional IPO is more complicated and expensive, as private companies typically hire an investment bank to underwrite /syndicate and issue shares of the soon-to-be public company. 
In a reverse merger, investors of a private company acquire a majority of the shares of the public shell company, which is then merged with the purchasing entity. Investment banks and financial institutions typically use shell companies as alternative vehicles to complete these deals especially when there are market headwinds. These relatively simple shell companies can be registered with the SEC on the front end (prior to the deal), making the registration process relatively straightforward and less expensive than a conventional S-1 IPO process. To consummate the deal, the private company trades shares with the public shell in exchange for the shell's stock, transforming the acquirer into a public company. 
A significant part of the conventional IPO expense is legal and regulatory preparedness paperwork - back and forth comment periods with the SEC in reviewing the S-1 with your lawyer. The investment bank also helps to establish a preliminary "book" of interest in the stock and provides advice on deal pricing. However, conventional IPO "windows" open and close all the time depending on prevailing stock market and company sector conditions, including how similar companies "comps" are trading or perceived by investors. Companies can spend hundreds of hours and hundreds of thousands of dollars on legal planning for a traditional IPO. However, if market conditions become unfavorable to the proposed offering, all of those hours and dollars will have become a wasted effort. Pursuing a reverse merger minimizes this risk.

A traditional IPO combines the go-public process with an underwriter capital raising function. Reverse mergers allow a private company to become public without raising capital, which considerably simplifies the process and dilution impact, as companies may not want to sell low priced shares when the company is emerging. In a traditional IPO, you may give away 15-33% of your company, and be charged up to 10% in fees including underwriter warrants.  

A reverse merger separates these two functions, making it an attractive strategic option for executives of private companies who may have their own investor and social media following, and don't initially require an investment banking shareholder syndicate.  And shell companies typically deliver shareholders to satisfy public trading regulatory requirements which varies depending on whether you are public on the Over-the-Counter (OTC) Market or a National Exchange like Nasdaq or NYSE. 


Jay Cooke performs the due diligence regarding the shareholder list /profile of the investors of the public shell company. What are their motivations for the merger? We do the homework for you to make sure the shell is "clean" with good provenance.  Are there pending liabilities (such as those stemming from litigation) or other "deal hair" hanging over the shell company like the sword of damocles. 
If so, shareholders of the public shell may merely be looking for a new owner to take possession of their problems. Thus, appropriate due diligence must be conducted, and transparent disclosure should be expected (from both parties).
If the public shell's investors sell significant portions of their holdings right after the transaction, this can materially and negatively affect the stock price, making it harder to raise capital. To reduce or eliminate the risk that the stock will be dumped, important clauses can be incorporated into a merger agreement such as required holding periods. It is important to note that, as in all merger deals, there is two-way risk. Investors of the public shell should also conduct reasonable diligence on the private company, including its management, investors, operations, financials and possible pending liabilities (i.e., litigation, environmental problems, safety hazards, labor issues, management backgrounds). A potentially significant setback when a private company goes public is that managers are often inexperienced in the additional regulatory and compliance requirements of being a publicly-traded company. These burdens (and costs in terms of time and money) can prove significant, and the initial effort to comply with additional regulations can result in a stagnant and under -performing company. 
After a private company executes a reverse merger, will its investors really obtain sufficient liquidity? Smaller companies may not be ready to be a public company, including lack of operational and financial scale. Thus, they may not attract analyst coverage from Wall Street; after the reverse merger is consummated, the original investors may find out that there is no demand for their shares. Reverse mergers do not replace sound fundamentals. We believe above all else, that you create shareholder value by focusing on a few unshakable interdependent fundamentals: a clear strategy, solid management, operational excellence and optimal capital structures. We believe that unresolved strategic or operational issues usually lead to financial distress. Our experience, expertise and proven methodologies help clients to identify strategic or operational solutions that optimize your profitability and growth.Getting [reverse merger] transactions successfully completed requires hard work, persistence and commitment of many participants, many of whom may be outside the company. We embrace the challenges of managing and influencing various stakeholders.
Many companies lack access to high-quality strategy and corporate finance advice. Jay cooke views fundraising as an ongoing effort.  To achieve near-term goals and position clients for long-term investor relationships, we play an active role during all points in the fundraising and post-financing cycle.At Jay Cooke, we perform transaction planning, deal preparation grounded in sound financial data, models, metrics and valuation.  We provide shell due diligence and capital source identification, and help you negotiate, structure and close your funding, as well as provide post close review, monitoring and stock support. We facilitate development of vast amounts of online content about your company and industry,  and distribute that content by targeting websites where investors already subscribe or congregate, leveraging the power of true syndication and third-party media.   Our close relationship with broad array of [shell providers] , capital sources – angels, high net-worth individuals, family offices, venture capitalists, corporate or strategic investors, hedge funds, asset managers, private equtity firms, traditional investor relations and online investor marketing and more results in completed financing's and excellent support of your public equity. And an infusion of capital from quality investors is typically viewed as enhancing the long term value of companies.