◆What is reverse merger?

1. Shell Company: The public shell is a publicly listed company with no assets or liabilities. It remains the listing identity and qualification though being without any business for kinds of reasons; some shell companies still trade in the market while some not. But either belongs to the shell company.

2. Reverse merger (acquisition of shell): refers to a private company becomes a subsidiary company of a public company by merger. The former shareholders of the private company hold 70% to 90% of the share ownerships of the public company.

 ◆Operation Flow Chart of Reverse Merger

◆Why do the enterprises do reverse merger and what are the advantages?

With the lasting and fast development of Chinese economy, non state-owned enterprises in China have developed from pursuing enlarging the business scale to striving to go public in all kinds of capital market in order to get support to enlarge the scale. Some enterprises have gone public or are preparing for going public in America. There are two ways to go public in America, direct listing (IPO) and indirect listing (reverse merger) and either has its own advantages. Reverse merger is very popular in America but it is still a new way to go public for Chinese enterprises. In recent years Chinese companies have gone public in domestic market by reverse merger but going public in America by this way has not been recognized generally by domestic companies. As a matter of fact, for the non-state owned enterprises in China, going public in America through reverse merger is relatively convenient and favorable.


Reverse merger is a normal form of acquisition and merger. It has a long history in America and is a shortcut to going public. At present, the companies adopting reverse merger have become more and more. The number of companies going public by reverse merger every year almost equals to those by IPO (either is about 350 cases).
The possible positive impact of listing in America: standard market operation procedures and no man-made restriction basically make the real cost of listing cheaper.


The company establishes international capital operation platform in listing in America and provides tools and stages for following mergers and acquisition, financing and withdraw.


The prestige of the company can get promoted. The prestige and corporate image brought by listing in NASDAQ can’t be gained by 10-million dollars’ advertising charge.


High-quality management and technical talents are absorbed. At present the nature of enterprises competition is actually talents competition. After having being listing in NASDAQ, the corporate prestige and stock options will be the important talisman in the process of talents competition.

The requirement for successful reverse merger is that the enterprise should have attraction, or development room. To be detailed, the growth rate of traditional industries should achieve over 20% and that of non-traditional industries should achieve over 30%. Meanwhile the enterprise should have an after-tax profit of over 1 million dollars. Besides, a high-quality management team and a CFO with fluent English are necessary.

1. From OTCBB to NASDAQ


There are no special requirements for OTCBB going to NASDAQ. The company can file the application in SEC to become NASDAQ public company as long as its standards have achieved requirements of NASDAQ. Also there are some companies with share price of over 80 dollars still remain in OTCBB though has already achieved requirements of NASDAQ. That is because the share price does not depend on markets but the companies’ own performance.


2.  Requirements for OTCBB going to ASDAQ


★ achieve the requirements of NASDAQ
★ File the application to SEC
★ The underwriters and market makers assist
★ The share price achieves 4 dollars

◇ Table 1: NASDAQ National Securities Market Listing Requirements

◇Table 2: NASDAQ Small Cap Market Listing Requirements

◆Comparison between reverse merger and other financing ways

Comparison between reverse merger (going public through buying a shell) and IPO:

1.Short Operating Time

The operation of reverse merger needs about three to nine months (buying a shell which is under transaction needs 3 months and buying a shell which has stopped transaction needs six to nine months); IPO generally needs one year.

2.Success Guarantee

IPO may cause withdraw of listing application by difficulties while listing because of unfavorable underwriters or unfavorable market. There is no success guarantee (1/3 of IPO being withdrawn), and the charge in earlier stage (for instance, lawyer's fee, accountants’ fee, printing expenses, etc) cannot be taken back; while there is success guarantee with reverse merger (going public through buying a shell) since the operation process of listing is not infected by external factors (only finding a good shell) and underwriters do not need to be involved. Especially American underwriters always pay attention to Chinese large-scale state-owned enterprises’ listing and underwriting in America. Generally private enterprises and joint ventures even with good performance do not have any chances to get the favor of the underwriters.

3.Low Cost


The cost of reverse merger is lower than that of IPO. The charge for IPO is usually more than 1 million dollars (with about additional 8% as commission for underwriters) while reverse merger needs about 500 to 700 thousand dollars (depending on different types of shells).

4. The company can finance (public offering, private placement) after becoming public company through successful reverse merger.


5. Capital can be obtained as soon as IPO has finished; while reverse merger need to promote the stock transaction by sedentary offering to raise money after the merger. At that time the underwriters start to get involved and underwrite the issuing of new stock since the company has become American public company.


6. IPO needs the underwriting syndicate formed by underwriters; while reverse merger needs financial consultant company and market maker to cooperate to ensure liquidity of the stocks.


7. IPO goes to NYSE or NASDAQ directly and with less chance while reverse merger starts from OTCBB and goes to the main board of the stock market according to market timing.