Make Sure Your Companies Are Not in the Reverse Merger Business

June 15, 2011

The SEC has put out an APB on reverse mergers.  According to the WSJ:

A “reverse merger” or “reverse takeover” is a backdoor process that allows a private company to merge with a public one so as to gain access to capital markets – and for much less cost than is involved in traditional initial public offerings. However, the process also requires a less stringent disclosure of information to investors, which is why many believe so many accounting issues arise from reverse merger firms.

According the SEC, there is some cause for concern because there has been some instances of abuse.

The Securities and Exchange Commission’s warning urged investors to be careful in transactions with reverse merger companies due to “instances of fraud and other abuses” that have resulted in investor losses.

This is one of those instances where reading the public filings are important.  If a foreign private company is getting into the U.S. through a struggling U.S. company, there could be a reason that it didn’t file for an IPO.

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