Cannabis Reverse Mergers
Are you looking to take your Cannabis venture public? Want access to higher amounts of funding? Going public is a great way of accomplishing that. Getting investments from friends, or family, or pitching for VC directly is the traditional method of fundraising. Many cannabis companies are exploring the idea of going public – which has it’s own set of issues. Investors like public financing, because it provides a short term avenue for liquidity that doesn’t exist for private companies. Companies like going public because they have a higher chance of getting the valuation they want in public markets, rather than pitching to individuals/individual venture capital groups.
If your company is looking to go public – we can help. We can help take your Cannabis company public through a reverse merger. In a reverse merger, a private company purchases a controlling share in a public company, and transfer it’s business assets to the new combined public company. The only asset the public company has which is purchased – is the fact it’s gone through the SEC registration process. The private company(your cannabis company), benefits by being able to skip the regulatory process.
How we can help
We can advise you and take you through the entire process. We’ll evaluate your business needs, and put together a business plan that helps you accomplish your goals. Our team of experts will find the right shell for you, and negotiate the entire transaction for you.
General info about Cannabis Reverse Mergers
Also known as reverse takeovers, they help private companies go public. It’s simpler, shorter, and less expensive than a conventional IPO. The traditional IPO combines the going public process with capital raising. In Cannabis reverse mergers, a private company acquires a majority shares of a public shell, which is then combined with the purchasing entity. The shells are registered with the SEC and this makes the registration process straightforward. To finalize the deal, the private company trades shares with the public shell’s stock. This transforms the acquirer into a public company. This transaction allows private companies to become public companies without having to raise capital. It simplifies the process of going public. Conventional IPO’s can take months, while reverse mergers for cannabis companies can take just a few weeks. Undergoing the traditional IPO process doesn’t guarantee the fact your company will go public. If stock market conditions are unfavorable, then the IPO can be cancelled. Reverse mergers don’t have the same level of risk.
Traditional IPO’s combine go-public and capital raising into one transaction. Because reverse mergers are solely to convert a private company into a public one, it doesn’t matter what the market conditions are.
Cannabis companies are already doing it
Many cannabis companies in Canada and the USA are using reverse mergers to go public. There is clear precedent, and the concept has already been explored and executed.
Benefits of Cannabis Reverse Mergers
Private companies love going public. Your securities become traded on an exchange, which increases liquidity. The original investors can liquidate their holdings, which allows for “exit” opportunities. The company has greater access to capital. Stockholders who have warrants, can exercise these options to provide additional capital infusion into the company. In addition, public cannabis companies trade at higher multiples than private companies. Both general public and institutional investors can buy the company’s stock, which can drive prices up. Management also has more options to pursue growth, like mergers and acquisition.
Disadvantages of a Cannabis Reverse Merger Transactions
Before going public, you have to vet the public shell and it’s investors. Look into why they want the merger, and make sure the shell is clean and not tainted. Look at if there are pending liabilities, or other potential issue with the shell. In some cases, shareholders of the public shell might just be looking for someone new to take over the problems. Due diligence is critical.
If a public shell’s investors sell huge portions of their stock right after the merger, this can negatively affect the stock price. To reduce stock being dumped, clauses should be added into merger agreements which require holding periods. As with all merger deals, theres risk for both companies. Investors in the public shell should conduct due diligence on the private company, including financials, possible litigation, operations, etc.
Cannabis Reverse mergers are an attractive options for private companies looking to go public. If you’re a cannabis company looking to go public, we can help. We have immense experience doing reverse mergers, and can help Cannabis companies go public with their reverse merger.
What is a reverse merger shell
How public options take place
There are several avenues a company can take when considering going public. An investment bank can create the Initial Public Offering. The next option is to have a lawyer working closely with an auditor to file the necessary paperwork with the SEC. The final option is to complete a reverse merger where the shell merges with the private company.
What is a reverse merger shell?
The reverse merger shell is the company that the private entity joins during the process. The shell company is public. The SEC company is defined as a company that has minimal operations. Its assets may be nominal in nature or any assets held consist of cash primarily.
How does the process work?
The private company assumes control of the public company. The private company purchases a substantial amount of shares in a carefully vetted public company. The private company gains controlling interest in the public company to complete the merger. The public company’s internal structure reflects the private company’s structure, and the stock is traded publicly on the exchange.
Why are reverse mergers used?
The reverse mergers are often expedient in getting a private company out there in the marketplace. The private company may be poised for growth but not have enough access to the capital necessary to expand. Private companies abroad may also use the reverse merger option to enter the domestic marketplace in the US. In some cases, the public company acting as a shell can hold assets. Another common purpose for the shell company is leverage as a tax shelter. The private company can also use the losses from the public one to reduce tax liability.
Main advantages of a reverse merger
There are numerous advantages to using a reverse merger to make a company public. A reverse merger is more efficient than the IPO approach. The shell company can bypass some of the hurdles associated with going public such as the comprehensive governmental review. The private company doesn’t require review if the public company has already been registered as a shell company. The reverse merger is much more affordable; it can completed at a fraction of the cost it would take to complete the IPO. Reverse mergers aren’t nearly as vulnerable to market conditions as IPOs. Valuation for a stock in a reverse merger can be higher once the process is complete. There are financing options available in the reverse merger process that improves the company’s liquidity.
What happens to the shares?
The shares between the private and public company are exchanged. Shareholders are able to get new or existing shares of the public company. Sshareholders will have controlling interest in the new company once the merger is completed. The private company’s shareholders will now be owners of shares of the newly created company that will be traded on the exchange.
The marketplace and the reverse merger
Market conditions can impact the IPO if there is any negative press about the company. Reverse mergers are less vulnerable to damaging headlines. The reverse merger functions as a tool used in converting a private company to a public one. This means that the value of the offering is protected, which is particularly beneficial as shares are being distributed, transferred, and reissued.
A reverse merger is designed to combine multiple entities into one. The private company acquires the shell. The public company assumes the identity of the private company. The company is then traded publicly on the exchange. The leadership, name and structure are all changed to reflect the new identity of the company.