Texas investors are always looking for companies that might improve their portfolios. Businesses have several options when seeking capital from public investors. A reverse merger is an alternative pathway for making a private company’s stock available to the public.
The difference between private and public companies
During a business’s startup period, it is typically owned by its founders or a few individual investors. At this private stage, the company leadership approves outside investments to a limited number.
A public company has stock that can be purchased and traded among stockholders on the open market. For the founders, this arrangement can mean a large influx of capital. However, it also means a change in governance and accountability.
Reverse merger vs IPO
When a company wants to transition from private to public, an initial public offering (IPO) is the typical pathway. The company sells shares to the public, changing the nature of its ownership.
In a reverse merger, a private company can bypass the lengthy IPO process by purchasing a majority share of a publicly traded shell company. The private company then becomes a subsidiary of the public company, and investors have access to the private company through the public one.
Pros and cons of a reverse merger
All business transactions have advantages and disadvantages. A reverse merger gives a private company access to capital while avoiding market shifts that can disrupt the IPO process.
However, for investors, the relative speed of a reverse merger may increase the investment risk. A shorter route to a public offering means less time for due diligence before investing.
Recognize the risk
It is important to remember that what is best for a company may not be best for an individual investor. Investors should always acknowledge their risk tolerance and use caution before making significant portfolio changes.