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What business owners should know about reverse mergers

Texas companies may be able to use a reverse merger to transition from a private company to a public one. This is done by trading its shares with those of a public shell company. A shell company can be registered with the SEC prior to the reverse merger taking place. One of the benefits of this strategy is that a company doesn't have to raise capital to go public.

There is also less risk that the deal will be cancelled because of unfavorable stock market conditions. When a company goes public, it enjoys greater liquidity and may trade at a higher multiple compared to a private company. Initial investors may be able to cash out or otherwise get the benefit of additional liquidity for their investment. However, in such a transaction, it is important to determine that the shell company is not tainted in any way.

Prior to engaging in a reverse merger or IPO, the company's management team should ensure that it is ready to go public. This includes making sure that there is demand for the company's shares. Without that demand, investors don't truly get any extra liquidity for their investment into the company. Finally, the company's management team should be ready to handle the extra regulatory requirements that a public company will face.

When a company first forms, it may be worthwhile to think about the exit strategies that investors or founders may have. This may help determine whether a business should explore a reverse merger or other methods of going public. If a company is ready to go public, having experienced legal counsel provide advice on regulatory compliance can be advisable.

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