| A reverse merger is the process of a public company | | | | earnings of $5,000,000 and wants to go public. ABC is |
| acquiring a private company. The private company | | | | put in touch with a shell company who is willing to |
| then becomes the owner of the public company and | | | | give them a majority of the stock in exchange for |
| in effect is now publicly traded. This is common with | | | | owning a small remaining stake in the company after |
| penny stock companies. | | | | the merger. The transaction takes place and ABC |
| When a reverse merger occurs, the name of the | | | | was bought by the public shell for.10 per share. After |
| public company is changed to the name of the | | | | the merger was finalized the company issued a press |
| private company and typically the officers and | | | | release that the private company is now public, the |
| management of the private firm are now in the | | | | management team is still in place, and there has been |
| same positions with the public company. The private | | | | a name change. Investors realize that this worthless |
| company has in effect merged with the penny stock | | | | penny stock now owns a company with $5,000,000 |
| and taken it over. In many cases, the penny stock | | | | in earnings. The company had 10,000,000 shares |
| was a mere shell prior to having been used for the | | | | outstanding meaning that the company would now |
| merger. The penny stock probably had little or no | | | | earn.50 per share. In this case, the stock could move |
| operations and only existed to be used by a private | | | | much higher giving a few lucky investors several |
| company that wanted to go public without going | | | | times return on their money within weeks. |
| through the extensive process of an Initial Public | | | | At this point, you can understand why reverse |
| Offering or IPO. The shareholders of the penny | | | | mergers can be attractive. Transactions like the |
| stock now own stock in the private business. | | | | above aren't always so smooth, but keep an eye out |
| To understand why a company would take the route | | | | for reverse mergers as part of the due diligence to |
| of a reverse merger, let's use the example of ABC | | | | find hot penny stocks. |
| Company, a computer software company. ABC has | | | | |