What is a reverse merger and what makes it risky?

What is a reverse merger and what makes it risky?

| Oct 26, 2020 | Corporate Law |

Most mergers in North Carolina involve a public company taking over a small private company. However, in some cases, a small private company can overtake a public company in a “reverse merger.” A reverse merger can make it easier for a private company to go public, but it can also pose risks for investors. Here’s what people need to know about reverse mergers.

What is a reverse merger?

A reverse merger occurs when a small private company takes over a public company by buying over 50% of their shares. By buying the majority of shares, the private company essentially owns the public company. They can merge the two companies and become one public company.

Why do reverse mergers occur?

Reverse mergers often occur when a private company wants to go public but doesn’t want to deal with the hassle of getting approval and dealing with paperwork. Instead, they take over a “shell” public company and make their company public. This can be risky for investors, as many businesses don’t survive a reverse merger.

Additionally, reverse mergers can offer opportunities for fraud. Some companies use reverse mergers to quickly go public and start taking advantage of investors. If an investor feels that a company might be committing fraud, they can talk to an attorney with experience in business law.

How can an attorney help business owners?

An attorney may be able to help business owners protect themselves from fraud and other illegal activities. An attorney might help a business owner get their business off the ground, purchase real estate, sign contracts, form business partnerships and more. They could also assist with business mergers and help companies go public on the stock market. Working with a business law attorney, a business owner could protect themselves from potential lawsuits.