Reverse Merger, also known as shell listing, means that the shareholders of a non-listed company control a shell company (a listed company) by acquiring its shares, and then the company reversely acquires the assets and business of the non-listed company, making it a subsidiary of the listed company. The shareholders of the original non-listed company can generally obtain 7%-9% of the controlling shares of the listed company.
reverse takeover process
The following flowchart mainly lists the operation sequence and company structure of reverse takeover. Among them, whether to carry out private financing depends on the situation. For the specific steps of reverse takeover, please refer to the detailed process.
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Detailed introduction of reverse acquisition process
1. Selecting intermediary companies
Intermediary companies play a very key role in reverse acquisition. Usually, these companies are familiar with the capital market in North America and have extensive contacts. They can help China's private enterprises to formulate reverse takeover strategies, and help China companies to find shell companies, securities brokerage companies, accounting firms, law firms and other related institutions in the North American capital market. There are many types of intermediary companies, some are professional financial consulting companies, and some are private investment companies or funds. In recent two years, more and more American companies have landed in North China through reverse acquisition, and the number of intermediary companies engaged in these businesses has also increased. What needs to be reminded here is that China companies preparing for reverse acquisition in North America should carefully examine the capabilities of these intermediary companies, and clearly stipulate the rights and obligations of both parties in the contract to avoid possible disputes in the future.
2. Selection principle of shell resources
The most important thing in selecting shell companies is to select some clean shells. The so-called clean shell refers to those shell companies that have no debts, a clear business history and no legal disputes and other problems left over. At the same time, shell companies have been reporting and registering on time according to the requirements of the Securities Law of the United States, and their listing qualifications remain intact. In addition, shell companies need to have enough "public shares" and "public shareholders" Considering the planning of listing and financing in the future, the shell company should have at least 3 shareholders holding more than 1 shares. After buying such a shell company, you don't need to spend too much time and energy to clean up and clean up. Although such shell companies are generally more expensive, they can save a lot of trouble.
when selecting shell companies, we must pay more attention to those companies that offer low prices. These companies often have long-term business stagnation, and various declarations and audits have not been completed. After buying such a company, it will take a long time to re-register and declare with the SEC. The process may not be much different from applying for listing.
generally, when buying a shell company, the buyer will send lawyers and accountants to conduct prudential investigation, and the shell company will also conduct reverse prudential investigation. The shell company shall provide the legal certificate to the buyer, proving that the shares of the shell company can be traded, and the issuance of shares also conforms to the provisions of Article 144 of the Securities Law.
3. Types of shell resources
Shell resources can be roughly divided into four categories, including:
(1) Shell companies that declare and trade
Shell companies regularly file declarations with the SEC, and at least one market maker is buying and selling the company's shares, which is the shell that declares and trades. This shell company can be listed and traded about three months after the acquisition is completed.
(2) Shell companies that report but have no transactions
Such shell companies regularly report to the SEC, but no market makers buy or sell the company's shares. This shell company can be listed and traded about 4-6 months after the completion of the acquisition, and its price is second only to the above-mentioned first-class companies.
(3) shells that are not declared but traded
This kind of shell that is not declared but traded mostly exists in the lower-level OTC market, for example, this type of shell company exists in the powder list market we mentioned earlier. It may take six months to buy such shell companies to go public.
(4) Shell without declaration and transaction
It will be cheaper to buy shell companies without declaration and transaction, but it needs more after-care work. Generally, it will take September to December to go public.
4. Operating nature of shell companies
(1) Bankrupt shell companies
Bankrupt shell companies are listed companies that have been ruled bankrupt by the court. According to the provisions of the bankruptcy law of the United States, such bankrupt companies can be exempted from all debts and lawsuits, thus solving the debt and legal disputes of the company once and for all. Although the listed company has declared bankruptcy, its listing qualification is still there, and the company may still have a large number of public shareholders. Therefore, such companies have become ideal shell companies.
(2) Closing the business shell
Compared with bankrupt shell companies, closing the business shell has not been exempted from debts and legal liabilities by the court. For example, some resource companies are in a state of suspension of business because of the exhaustion of resource projects, and the company has not been insolvent, and the listing qualification of the company has been retained.
(3) Blank check shell company
Blank check shell company is a shell company specially for people to buy. At the beginning of its establishment, such companies should explain to the SEC that they do not engage in any business. At the end of 199s, such companies were very popular. Later, due to the strengthened supervision of the SEC, the number of such companies decreased a lot.
(4) Split shell
Split shell means that a listed company splits a part of its own business and makes the split company also eligible for listing. Because this company still has business operations, it may have corresponding debts or lawsuits, but it will be helpful for the listed company to raise its share price in the future.
(5) 54 Shell and 419 Shell
54 Shell are companies established after issuing the raised funds according to the provisions of the US Securities Law on Direct Public offering. A shell company formed by listing in OTCBB after submitting relevant registration documents to the SEC. Direct public offering is a way of public offering with the rise of the Internet. Issuers do not need to go through intermediate links such as investment banks or brokers, and directly use the Internet to publicly issue shares. The scale of funds raised by this issuance method is small, generally below $5 million. The origin of the 419 shell company is very similar to that of the blank check shell company mentioned in the previous article.
5. Corporate restructuring and the establishment of offshore companies
After the shell companies are selected, China companies are usually reorganized. The principles of reorganization include clarifying property rights, balancing interests, reducing correlation, optimizing allocation and minimizing costs. The goal is to meet the requirements of relevant securities laws and regulations in North America, and at the same time lay the foundation for the company to further raise funds in the North American capital market in the future.
From the experience of several successful reverse acquisitions in North China by American companies in the past, it is common to set up offshore companies. The establishment of offshore companies can create convenience for China companies to enter the capital market in North America, and at the same time, it can avoid some restrictions of relevant policies and regulations in China. However, it should be emphasized that China companies should abide by the policies and regulations of China and relevant countries in North America when making reverse acquisitions in North America. Offshore companies are set up to facilitate the listing and financing of companies in North America, not to transfer assets, and should not use this means to turn the original state-owned assets into private property. This kind of behavior should not only be investigated by the laws of China, but also be unacceptable by the laws of North America.
At present, the famous overseas registration places in the world include British Virgin Islands, Cayman Islands and Bermuda. These overseas registration places provide many conveniences and services to attract foreign companies to register here, including: complete confidentiality, anonymity and no need to declare annual reports; Exemption from tax may postpone and reduce the tax burden; No foreign exchange control, etc. In fact, these overseas registered places are popular in China because they are an important part of the curve listing of China companies. Brilliance China, one of the earliest China companies listed on the new york Stock Exchange, is a holding company registered in Baimu University. Since then, overseas Chinese have also adopted the same approach. Usually, we call this method shell listing. Companies registered in Cayman Islands and Bermuda can apply for listing in Hong Kong as well as in North America. The Cayman Islands has a well-developed financial industry and is an ideal place for various financial institutions and investment funds. The Virgin Islands is the largest offshore company registration place in the world at present, and according to relevant statistics, 29, foreign companies have registered here.
Companies registered in Cayman and Bermuda can bring a lot of convenience for listing in North America, but it may have some adverse effects on the company's image. Corporate integrity has always been the most concerned issue for institutional investors and individual investors in North China. These companies from tax havens inevitably make people feel uneasy. For example, after Brilliance Auto was listed in the United States, it was difficult to raise funds later, and finally it went back to Hong Kong for refinancing. Therefore, if conditions permit, China companies can also consider "citizenship" to enter the capital market in North America.
6. Tax considerations in reverse takeover
If the shell company still has certain assets, tax considerations should be taken into account in the process of buying the shell. For example, if the book value of a company's assets is $1 million and the market value is $5 million. According to the American tax law, the seller has to pay the corresponding income tax or capital gains tax. However, after acquiring these assets, the buyer's depreciation is still based on the book value of $1 million, so he can't get the preferential tax deduction provided by depreciation. In practice, buyers and sellers should adjust the book value of the acquired assets according to the relevant provisions of the US tax law to make it consistent with the market value. In this way, both parties can get tax benefits.
7. Market makers
Market makers have played a key role in the American stock market. The number of market makers is also one of Nasdaq's requirements for companies applying for listing. Companies listed on OTCBB mainly rely on market makers to provide quotations. If these companies want to apply for listing on higher-level exchanges in the future, they must get enough support from market makers.
8. Financing methods after listing in OTCBB
For China companies, listing in OTCBB only stepped into the North American capital market, but it did not get more financial support. Therefore, it is particularly important to understand the financing methods after OTCBB is listed. In fact, listing and financing do not have to be divided in order. Many American companies make reverse acquisitions in North China and raise funds at the same time. In terms of financing methods, at present, capital private placement is mostly adopted. When we introduced the financing tools of North American capital market, we once introduced private placement. Because it belongs to a financing method that is exempt from the approval of the US Securities and Exchange Commission and the supervision has been relaxed recently, it has been adopted by many China. Other financing methods that are exempt from SEC review include in-state offering and small direct offering, but they are not very common.
issuing new shares and issuing restricted shares to the public are also financing methods that companies can consider. However, these financing needs to apply for the approval of the SEC, and it needs to hire intermediaries such as investment banks, so the cost is higher. The lawyer's fee, filing fee and audit fee for issuing new shares are about $15,, and the underwriter's commission is fixed, but in general, the cost of issuing new shares will definitely be lower than that of initial public offering. The cost of issuing restricted shares may be between $4, and $1 million.
Since the company's shares can circulate after listing on OTCBB, it will be more attractive to venture funds and private funds, so China companies can also consider attracting direct investment from funds. In principle, China companies can also apply for short-term financing or issue bonds in financial institutions, but it may be difficult for China companies that have just listed in North America.
whether China company can successfully carry out financing fundamentally depends on the company's financial performance, followed by whether the company's shares are liquid. Although it has been pointed out that the financing ability of companies listed on OTCBB is poor, as long as the growth potential of the company can attract investors, successful financing is not impossible.
9. Disclosure and maintenance after listing
Information disclosure is the basis of securities management, and the core of the Securities Law promulgated in 1933 is information disclosure in the primary securities market. In 1982, in order to simplify and clarify the management of information disclosure, the SEC formulated a comprehensive information disclosure system, which is the standard that listed companies in the United States abide by at present. Disclosure and maintenance after listing is very important for China companies to continue financing in the future, and professional companies providing investor relations services and public relations services here can provide great help. These financial public relations companies are familiar with the disclosure principles of the North American capital market and have extensive contacts among institutional investors and individual investors. Financial public relations companies can design different solutions for investors' relations and public relations. With their help, China Company can expand its popularity and improve its image in a short time. Judging from the actual situation of North American capital market, some large companies have set up special departments to be responsible for investor relations, while small and medium-sized companies entrust these businesses to special financial public relations companies.
1. SEC's supervision of reverse mergers
With the active reverse mergers and acquisitions of OTCBB, the SEC is constantly improving the management standards of this OTC trading system. These standards for customs supervision in Taiwan include: the auditor who is required to sign the audit report must be a member of the American public Committee; After the successful listing of the enterprise; It is necessary to provide 8K announcement to the SEC within 5 days, which shortens the time limit for reporting; The SEC also strengthened the financial report review of shell-buying enterprises in OTCBB market. I believe that in the future, the SEC will continue to strengthen its supervision over OTCBB and reverse takeover.