In a reverse merger, a public shell company acquires a private operating company. The public shell trades on an exchange and reports to the Securities and Exchange Commission, even though it has modest or no operations. Private companies interested in reverse mergers generally are U.S. start-ups or foreign companies seeking to go public in the U.S. without having to file an S-1 registration with the SEC. The publicly trading shell survives the merger, and the private company takes control becoming the operating entity within the shell, then changes the name ticker symbol.
Look at the chart of the company you suspect has completed a reverse merger. Many stock price charts indicate if there has been a reverse merger, but if not, look for a drastic change in price. That is a good indication that something important happened with the stock.
Go online to the SEC's EDGAR database and look up the company you are investigating. The early disclosure documents should detail any transactions such as reverse mergers. These documents should have a company history listing previous names and ticker symbols.
Look in "news and financials" or "corporate actions" in the Pink Sheets section of OTC Markets, if the company does not report to the SEC. If there has been a ticker symbol change or name change, the company has likely transacted a reverse merger. Check the news archive for releases indicating such an event.
Pay attention to reverse stock splits. Most post-merger companies declare a reverse split for their stock to limit the control of the original shareholders. Such a reverse split is likely to be something close to a 1-for-40 share reverse split. This means a person who held 4,000 shares, for example, will only own 100 shares of the new post-merger company, although the total value of those shares will remain the same.
Call the Financial Industry Regulatory Authority's (FINRA) call center at (301) 590-6500 if you are unable to find anything definitive or if you have further questions. FINRA receives notice of all reverse mergers, and will be able to clarify whether a company has had such a transaction.
- Sometimes large, established private companies perform a reverse merger into a public company for strategic purposes. But using a reverse merger as a back-door IPO is much more common, particularly in the case of NASDAQ and Pink Sheet companies.
- Some people believe that buying the stock of a shell company that is trading in the market, in hopes of a reverse merger, is a good way to make money. However, because the stock will most likely be reverse-split, leaving you with a fraction of the number of shares you bought, it is unlikely to be a good investment.
- The New York Times; Taking a Chance on a Reverse Merger; Andrew Pollack; March 2009 -`
- The Wall Street Journal; SEC Questions Nasdaq's Reverse-Merger Plan; Brendan Conway; September 2011
- U.S. Securities and Exchange Commission: Investor Bulletin: Reverse Mergers; June 2011
- Forbes; Don't Get Busted By A Back-Door Registration; Brent Radcliffe; May 2011
- OTC Markets: Corporate Actions — OTC Pink Symbol & Company Name Changes
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