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What is a Reverse Merger and Why Should I Care?

May 12, 2017

 (Photo via Flickr)

 

There are a few different ways that companies can become publicly-traded. Many have heard of an initial public offering, but few are familiar with reverse merger transactions. For most cannabis-related companies, a reverse merger may be the only option.

 

Reverse merger transactions, also known as reverse takeovers or RTO's for short, are a way for private companies to access the capital markets in the U.S. and beyond by merging with existing public companies. The existing public company has already met their exchange's respective listing requirements, thus paving the way for the private company it will merge with.

 

Reverse Mergers 101

 

In the average reverse merger transaction, an existing public “shell company,” acquires a private operating company. In most cases, the private company's management team will take over the board of directors and management of the public shell. The assets as well as business operations of the surviving merged public entity are usually those of the once-private company.

 

How the Transaction Works

 

Typically, the shareholders of the private operating company exchange their shares for a large majority if not all of the shares of the publicly traded shell company. Although the public company survives the merger, the private company’s shareholders secure a controlling interest in the voting rights and outstanding shares in the public company.

 

Recent Reverse Merger Examples

 

There have been a few recent reverse mergers announced that can help illustrate this type of transaction. Most recently, Atlantic Alliance Partnership Corp. (NASDAQ:AAPC) and Kalyx Development Inc. (private) announced that they would be merging.

 

In this case, Atlantic Alliance Partnership Corp. was a publicly-listed blank check company with no operations. Kalyx on the other hand is "a private real estate investment trust focused on owning and operating commercial real estate facilities leased to cultivators, processors and/or distributors in the regulated U.S. cannabis industry."

 

Following the merger, "the surviving public company, which is expected to be organized as a Maryland corporation, will be re-named Kalyx Properties Inc." This allows Kalyx to be public without going through the long and costly IPO process that the other cannabis-focused REIT, Innovative Industrial Properties Inc. (NYSE:IIPR), had to go through. 

 

Reverse mergers are not just for companies trying to access capital markets in the United States. Another recent example of a reverse merger was WeedMD Inc.'s (now TSXV:WMD) reverse merger into Aumento Capital V Corporation (formerly TSXV:AMN). 

 

Conclusion

 

We hope this was a useful beginner's guide to reverse mergers. Since so many cannabis companies get onto the public markets via this type of transaction, it is important for marijuana stock investors to have a firm grasp of what it all means. 

 

To stay in the loop on important cannabis updates, be sure to subscribe to one or more of our free newsletters. 

 

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