May 14, 2024

Reverse Mergers: Alternatives to a “Fallen Angel” Deal

Last month, I blogged about reverse mergers and highlighted a WilmerHale memo discussing some of the reasons that a reverse merger might be an attractive alternative to an IPO for some companies.  This Mintz memo addresses several FAQs about reverse mergers, and this excerpt points out that the traditional reverse merger scenario involving a deal with a “fallen angel” public company isn’t necessarily the only game in town:

Are there types of reverse mergers other than fallen angel deals?

Yes. There is an alternative public offering process that has been used by a number of companies with prominent private investors: The company merges with a true Form 10 shell company; raises capital from institutional investors and retail investors in a concurrent PIPE; trades on the over-the-counter market after closing; and then uplists to Nasdaq when positive business developments or other circumstances permit it to raise $40 million or more in a public offering.

This can be very attractive for certain private companies, as all shareholders after the deal will have decided to invest in that company (not the former business of a fallen angel), and the company’s true IPO and up-listing to Nasdaq can be timed with good market conditions, positive business developments, or other results. In addition, the true IPO can then typically be closed in around a month, because the company’s disclosure will have already been reviewed by the SEC as part of the reverse merger process.

Other topics addressed in Mintz’s memo include whether a reverse merger is a good IPO alternative, how difficult it is to identify potential fallen angel partners, the advisability of doing a simultaneous PIPE financing, the ability of foreign companies to obtain a Nasdaq listing through a reverse merger, and the implications of recent comments from the Corp Fin Staff on the ability of reverse merger companies to register shares of their affiliates for resale.

John Jenkins