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.
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."
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.
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