TAILIEUCHUNG - Investor Bulletin: Reverse Mergers

Prior to the 1980s, most preferred stocks were issued by regulated utility companies. From 1950 to 1979, 90 of the 108 preferred stock offerings were made by utilities. In the mid-1980s, financial firms began to issue preferred stocks, but the explosive growth in preferred stock issued by financial firms did not occur until after the Federal Reserve’s 1996 ruling on Tier 1 capital. Financial institutions became the dominant issuers of preferred stocks by the late 1990s. While non-financial firms in aggregate have been issuing a steady 30 to 60 new preferred stocks a. | Investor Bulletin Reverse Mergers Introduction Many private companies including some whose operations are located in foreign countries seek to access the . capital markets by merging with existing public companies. These transactions are commonly referred to as reverse mergers or reverse takeovers RTOs . What is a Reverse Merger In a reverse merger transaction an existing public shell company which is a public reporting company with few or no operations 1 acquires a private operating company usually one that is seeking access to funding in the . capital markets. Typically the shareholders of the private operating company exchange their shares for a large majority of the shares of the public company. Although the public shell company survives the merger the private operating company s shareholders gain a controlling interest in the voting power and outstanding shares of stock of the public shell company. Also typically the private operating company s management takes over the board of directors and management of the public shell company. The assets and business operations of the post 1 See Securities Act Release No. 8587 July 15 2005 70 FR 42234 42235 July 21 2005 . merger surviving public company are primarily if not solely those of the former private operating company. Why Pursue a Reverse Merger A private operating company may pursue a reverse merger in order to facilitate its access to the capital markets including the liquidity that comes with having its stock quoted on a market or listed on an exchange. Private operating companies generally have access only to private forms of equity while public companies potentially have access to funding from a broader pool of public investors. A reverse merger often is perceived to be a quicker and cheaper method of going public than an initial public offering IPO . The legal and accounting fees associated with a reverse merger tend to be lower than for an IPO. And while the public shell company is required to report

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