BAD ACTORS

One of the principal reasons given for the disfavor by regulatory authorities reverse mergers, as opposed to an IPO, is that the reverse merger process is frequently the refuge of “bad actors” or bad companies which could not endure the regulatory examination involved in the registration statement. Although this attitude is probably misplaced (bad actors can disguise themselves in an IPO just as well as in a reverse merger) there is some truth to the idea.

One of the cautions that should be employed by any company intending to go public through a reverse merger is to determine the true identity of the persons who are promoting or controlling the public company. If those persons have a track record of fraud or of manipulating the market, and they own or control any portion of the public float, the private company could find itself inheriting the situation where trading for their shares will be controlled and manipulated by persons with which they would rather not be associated.

On the other hand, even if the promoter has no adverse regulatory history, he or she still may engage in activities which are prejudicial to the company. For example, such persons could foment a rise in the trading price of the company stock, sell their shares, and then cease promotional efforts, leaving the company with a depressed stock price and a negative history. This negative history could adversely affect the company’s ability to raise capital in the future.