A REVERSE MERGER BRINGS WITH IT THE POSSIBILITY OF LIABILITIES, BUT MORE CERTAINTY

The reverse merger brings with the possibility of unknown liabilities, but more certainty in the process.

If the public company into which the private company is carrying out a reverse merger to go public is a reporting company, liabilities should be readily  apparent on the balance sheet. Or, the liabilities may not have been accurately reflected. If the public company has significant operations, there may have been employees, for example, who have not been paid. There may be sales tax or even income tax liabilities, or the dreaded payroll tax liability. Ferreting out these issues might require quite a bit of due diligence.

In addition, the public company comes with an already existing shareholder base. Although the identity of the shareholders can be seen from the shareholders’ list, shareholders who already own a street name will not be visible unless the private company obtains a NOBO list. A NOBO list is simply a listing of the persons who hold in street name that is, through their brokerage accounts, who have not objected to the release of their information. However of course, if the shareholder objects, one cannot find out the identity of that shareholder. And, even if a private company does ascertain the identity of each shareholder, they may be persons who have no negative history or maybe nominees for other persons.

On the other hand, going one’s own way with the traditional IPO ensures that the company is not burdened with the liabilities of prior operations of the public company nor with any shareholders. It has only itself to blame if it has problems. However, because completion of the going public.processes are  subject to the determinations of regulators, such as the SEC, FINRA, and DTC, as well as other potential regulators, there is a degree of uncertainty where this process can be completed.