IPO vs Reverse IPO

The pros and cons.


An IPO (Initial Public Offering) is the first time a stock of a private company is offered publicly. The purpose of an IPO is typically meant for younger companies to easily do a capital raise.

Reverse IPO:

A Reverse Merger (A.K.A. Reverse Take Over and/or Reverse IPO) is a more cost effective and less tedious process in comparison to a traditional IPO. The main purpose is commonly used for allowing early stage investors and managers to liquidate their stakes as well as capital raises. In Reverse IPOs, investors buy majority (and, if possible, all) shares of an existing shell (public entity).


Reverse Mergers offer an expedited process that is much more cost effective in comparison to the IPO. Conventional IPOs take months and even over a full calendar year at times while the average time span for reverse mergers is measured in weeks and even as quickly as 30 days. This ensures that team players have sufficient time and energy devoted to running the company. Additionally, Reverse Mergers are not market dependent. As mentioned above, the main purpose is NOT a cap raise but instead a vehicle for share liquidation. This means that macroeconomics play a lesser role on the consummation of the deal.

Traditional IPOs offer the main advantage of a much more lucrative cap raise. Moreover, conducting a traditional IPO allows the founders and investors to own 100% of the public entity whereas it is common to find public shells with 10%-20% accounted for with existing stockholders for reverse mergers.


Reverse IPOs present a number of potential problems and require extensive due diligence. The company must be comfortable with inheriting potential pending liabilities known as “deal warts” which is a result of litigations between the company, founders, investors, miscellaneous shareholders and third-party entities.

Traditional IPOs also contain many drawbacks. As mentioned above the process is lengthy and demands many resources, time and a significant amount of capital. Similarly, investors and founders alike will have difficulty with liquidation. There is a 6–12 month restriction for stock liquidation (with an occasional 10% total holding stock). This restriction is used to safeguard both the company and the stockholders. This prevents the possibility of insider trading with a dump of shares onto oblivious buyers as well as safeguards the company’s valuation from plummeting, as a result, selling shares from an uneducated employee, investor or management member that own a significant portion of stock.


Both obtain significant advantages and disadvantages with a common benefit being an increase of company awareness with the general public which can increase overall business and revenue.

Needless to say, be wary of the temptation for quick capital as it is luring. You must first weigh out the costs and the benefits before making a commitment to go public. You can choose one or decide to stay private.

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