Reverse Merger (IV)

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Reverse Merger (IV)

Two modes of going public through buying a shell

The typical going public through buying a shell is as described as the example illustrated hereinabove—an operating private company is merged with a listed company (shell company), and the shell-buying company will become the subsidiary of the shell company after having invested assets in such shell company. For this end, two companies shall arrive at an agreement concerning the right to control the merged companies prior to such merger. It shall be noted that the shell-buying company cannot obtain all shares of stock of the shell company—in general, the unlisted company may represent 70%~90% of the total shares of the listed company.

The other mode of going public through buying a shell is the mode of bonus issue. With such mode, some cost, obligations and expenses can be avoided for the shell-buying company. As to going public through such mode, the company concerned shall provide the audited financial reports of three years or all financial reports from its establishment. The operating procedures is introduced as below: a private company shall issue additionally 6 million new shares, and sell a small part (5%--6%) of such shares to a public company; then the public company will issue the received shares to its shareholders as bonus, and go to register at SEC. After the procedure above, the said private company will be qualified as required for a public company—having a reporting public company, the necessary documents for registration at SEC, at least 0.3 million shares being circulated in the market and the number of shareholder as required for a public company. Although this method is theoretically feasible, SEC bans the public companies to do such similar equity transaction as understood by us. Hence such practice is unacceptable to USA.

Selecting the intermediary company

Intermediary company plays a key role in reverse merger. Such intermediary companies are usually quite familiar with North American capital market, and have extensive human relations. They can help private Chinese enterprises to work out the strategy for reverse merger, to look for the shell company, security broker, accounting firm and law firm and other necessary organizations in North American capital market. There are many types of intermediary companies, such as the professional financial consultancy company, private investment company or fund and so on. More and more Chinese companies have gone public through reverse merger in North America in recent two years, and there are more and more
intermediary companies engaging such service therefore. It shall be noted that the Chinese companies ready to implement the reverse merger in North America shall scrutinize the capability of such intermediary companies, and define expressly the mutual rights and obligation under contract, so as to avert the possible dispute in the future.