Reverse Take Overs & Shell Companies

One of the methods of going public in Canada is through a Reverse Take Over (“RTO”). Whereas they are known as Reverse Mergers in the United States.   An RTO is completed by a company through the merger or amalgamation with a private company and a shell company.   In particular, the shell company must be a reporting issuer with one of the provincial securities commissions.

Reverse Takeover, RTO, reverse merger, Reverse Take Over, Shell Companies, reporting issuer

65-70% of companies that go public in Canada go public through a Reverse Take Over – RTO

Reverse Mergers & Reverse Take Overs

Many companies complete their going public transaction through a Reverse Take Over (RTO). In fact, between 65-70% of companies do so through Reverse Take Overs.

Don’t confuse them with the American Reverse Mergers.  In fact all Reverse Take Overs in Canada are n stock exchanges.  For the most part, a majority of American Reverse Mergers are on the OTCBB or OTCMarkets.

What is the difference?  The main one is that RTOs in Canada are reviewed by the regulation department of a stock exchange before being approved.  Conversely, with Reverse Mergers in the United States, there is no substantive review by any regulatory authority. For this reason, reverse mergers on the over-counter-markets are fraught with issues. Consequently, this leads to problems with attracting financing and liquidity in your market.

On the other hand, RTOs do not close until there is approval from the regulation department of the stock exchange the resulting merged company will list on. This avoids many problems and confusion.

What should I look for in a Shell for a Reverse Take Over?

The beginning of any successful RTO transaction starts with finding the right shell company which is a reporting issuer. Secondly, you need to perform initial due diligence with the available public disclosure. In short, some of the questions you need to ask yourself about the shells would include:

  • Are there any contingent liabilities?
  • Who are the controlling shareholders?
  • Is there any current or potential outstanding litigation?
  • What is the shells reporting issuer status?

Together with the above you also want to know who the directors are since they will be part of the decision to complete a transaction. Are they easy to work with? Have they historically kept to their word? These are all key factors.

Preferably you want to source a shell that has cash with little or no debt.  Although hard to come by, the cash amounts vary in shell companies anywhere from $200,000 to $2-$3 million.

There are good and bad shell companies out there.  For instance, some have too much debt where the creditors are unwilling to convert to shares.   As well, sometimes that control people set the bar to high to complete the deal.  In the end, choosing the right shell company is important as the wrong one can be a short road to failure.

The Reverse Take Over Process

The process of a Reverse Take Over can vary depending on the situation.  In most cases, it would be safe and wise to plan out at least 31/2 months for the process.

Below is a general overview of the process:

Reverse Take Over, RTO, Process
Initial Public Offering, Stock Exchanges
As you are working with other groups there can be delays. For instance, you may be delayed due to negotiations with the shell. Some other delays could be:

Audit

Audited financial statements of the company going public are required. If your accounting books are not completed or started, this will cause a delay. Start now. Financial foresight is important. The number of historical audited financial statements you would need depending on the stock exchange. Non-venture issuer exchanges require 3 years and venture issuer exchanges require 2 years.  As a reporting issuer the shell company, if in good standing, will have the required audited financial statements.

Investment Dealer

When choosing your investment dealer or the investment dealer that chooses you, find out what their current bandwidth is.  As well, find out what type of timing do they foresee with completing a financing. The investment dealer may be an Investment Industry Regulatory Organization of Canada (“IIROC”) dealer or an Exempt Market Dealer (“EMD”). Keep in mind that only IIROC dealers can provide a sponsorship report.

Stock Exchange

The timing of the stock exchange is important. They might be dealing with a lot of listings and lack of resources. Therefore, the timing for approval by the exchange will be longer.

Other

Always consider that there will be delays due to holidays and the time of year such as summer. As well, individuals that you work with might have medical issues, other emergencies, and vacations.

Reverse Take Overs & Long Term Success

For long term success it is important to have an investment dealer being a part of your Reverse Take Over listing. This may be in the form of a brokered private placement concurrent to the RTO. However it could a non-brokered private placement with a sponsorship report by the investment dealer. Too many companies go public without an investment dealer and orphaned.  As a result do not find long term success.  In addition, when choosing a stock exchange for your Reverse Take Over transaction you will have to decide which exchange is best for your listing.  For example, if you are going to acquire other companies you will need to decide whether you want to list on a non-venture issuer exchange or a venture issuer exchange as the threshold for completing a Business Acquisition Report (“BAR”) are different.  A BAR can be timely and costly.

Conclusion

The RTO transaction is something you want to start on the right foot, right at the beginning. Planning and getting the right team together for the RTO is something many companies do not do.  Consequently, the latter situation turns out to increase costs and time as well as lowering the potential success rate for completing the transaction.  For these reasons, its important to review Going Public Considerations.

If you would like to learn more about completing a going public transaction through an RTO with a reporting issuer shell company, please fill out the form.  Accordingly, a member of our team will contact you.