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A reverse merger, in its simplest form, is the process when a larger company is taken over by a smaller one for the main benefit and intention of becoming a publicly-traded corporation.

Often times, a publicly-traded corporation is called the "shell corporation" simply because it has very little assets. Although it continues to be publicly traded, the corporation's assets have actually evaporated through liquidation or bankruptcy and what remains now is the company's shareholders and internal structure. The "shell company" is then acquired by a private company by purchasing the controlling interest through the issuance of new stock.

Usually, the newly merged company will assume the name of the private company, appointing new corporate officers and board of directors. At this point, the newly merged corporation files and submits few forms with securities works and regulators to keep the minimum required number of shareholders for the inclusion in the stock exchanges.

Reverse Merger Benefits
Obviously, from the perspective of the private company, a reverse merger gets rid of the IPO expenses as well as the hassle and time associated with the transition of a private entity to a public one. The time factor should be carefully considered because a they actually allow you to make a quicker transition compared to an IPO.

Are there any disadvantages to doing a reverse merger?
Unfortunately, a reverse merger used as a tool for going public possesses some disadvantages. The first disadvantage is the cost that comes with the "shell company" itself. As more and more people become familiar with the advantages of reverse mergers, the cost of the "shell companies" has increased sharply.

It's possible that you could spend as much as $500,000 or even more in the scenario of a reverse merger and the shell company owner could keep a percentage of the ownership of the new company.

In addition, a reverse merger is associated with the same risks that you could incur in purchasing any business. Hidden debts, pending litigation, and imprecise reporting can have an adverse effect on you if you fail to conduct and perform sufficient due diligence. It's also worthwhile to find out why the "shell company" has gone out of the business. If the issues are not resolved or no explanation has been made to satisfy you, then it's probably better to move onto the other candidate.

Lastly, you have to be cautious of reverse merger agents or promoters. In some important cases, reverse merger promoters take advantage of immature and inexperienced business owners. In essence, these promoters involve the owner with the "locked up" stocks in the new public company and then move on to pumping and dumping their own stocks, which as not restricted similarly.

By the time the owner can sell, the stock price is already useless since the promoters have already sold their stocks and have moved to their next potential victim.

In essence, a reverse merger is the process of when a larger company is taken over by a smaller one for the main benefit and intention of becoming a publicly-traded corporation.