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SPACs vs. Reverse Mergers Which is the Better Option

Special purpose acquisition companies (SPACs) and reverse mergers are two of the most popular methods through which private companies can go public. Both of these methods have significant similarities, but they also differ from each other in terms of their specific working methods. 

 

Let’s discuss the various aspects of SPACs and reverse mergers in detail so that you can choose the best method to take your company public. 

Overview of Reverse Mergers

A reverse merger is a type of transaction through which a private organization is able to merge with a publicly traded shell company. 

 

As a result, the private entity does not have to go through the traditional initial public offering (IPO) process. Instead, the private company takes over the publicly traded shell company. 

 

It is important to note that the role of a reverse merger transaction is much more than going public. Private organizations also use reverse mergers to raise capital, enhance their visibility, and get better access to the public markets. 

 

Overview of a SPAC

financial inspector and secretary making report

A SPAC is a publicly traded entity that raises capital via an IPO with the end goal of acquiring a private company. It is different from the conventional IPO process and is often considered to be a more reliable option for going public.

 

Once a SPAC has raised enough capital, it will start searching for a suitable private company to acquire. These steps involve target company identification, deal finalization, and company acquisition. 

 

By the end of the process, a private company becomes publicly traded without going through the expensive and time-consuming process of a traditional IPO. An audit firm in Malaysia can help businesses choose the best method to go public. 

Differences Between SPACs and Reverse Mergers

There are various similarities between SPACs and reverse mergers because both of them are meant to help a private company go public. Nevertheless, there are some distinct differences between them as well. It is important to be familiar with these differences to choose the best way to go public. 

Oversight

One of the most significant differences between SPAC and reverse mergers is the kind of oversight required by these methods. 

 

A traditional IPO involves much more regulatory oversight than any of these methods. You have to disclose complete financial information in a conventional IPO, which can take a lot of time. 

 

On the other hand, SPACs and reverse mergers both have less regulatory oversight, especially SPACs. As a result, the process of going public is quicker and less time-consuming. 

 

Identification of the Target Company

Another difference between a SPAC merger and a reverse merger is associated with the identification of the target company. 

 

In a SPAC, you have to identify the target entity before the merger is completed. On the other hand, a reverse merger involves a private company that is under the control of a public shell company.

 

As a result, a SPAC merger provides more control to the target company over the specific terms and conditions of the merger. In comparison, a reverse merger provides more control to the private company over the terms of the merger. 

 

Transparency Issues

It is important to note that both SPACs and reverse mergers have often been criticized for passing over the traditional IPO process. 

 

The issue of transparency is even more prominent with reverse mergers, as many argue that they provide a way for companies with poor financials to enter the public markets. 

 

Companies that don’t rely on experts, such as audit firms in Malaysia, might not have sufficient financial and legal documents. As a result, the transparency issues became even more severe. 

 

Nevertheless, it is important to note that not all organizations that go public via SPAC or reverse mergers have poor financials. In fact, nowadays, most companies pay special attention to their financial health before even initiating these procedures. 

 

How to Determine the Value of a Business

Option to Redeem

In a SPAC merger, investors have the option of redeeming their investments. It is useful in setting a floor under the stock price as per the date of the merger’s completion. However, the option of redeeming is not available in reverse mergers. 

 

Moreover, SPAC shareholders also have the right to vote on the proposed merger. If the vote is unsuccessful in winning approval, the sponsor will likely have to liquidate the SPAC and return all of the funds to the investors. 

 

All in all

Overall, there are significant similarities as well as differences between SPAC and reverse mergers. If you are thinking of taking your company public, it is highly recommended to rely on professional audit firms in Malaysia to choose the best path through a reverse merger, or SPAC. 

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