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Have you ever heard of a Reverse Take Over (RTO)? If you’re not familiar with it, let's explore together.
What is a Reverse Takeover (RTO)?
The Canadian capital markets can be accessed by companies through listing on the Toronto Stock Exchange (TSX) or the TSX Venture Exchange (TSX-V). There are several methods as to which this can be achieved- an Initial Public Offering (IPO), a Special Purpose Acquisition Vehicle (SPAC), or a reverse takeover (RTO) of an existing publicly listed company.
An RTO is completed by a public company, a private company, and a shell company through a merger or amalgamation. In general, an RTO is a process where a private company can become a publicly traded company without going through an IPO. This is achieved by the RTO transaction, where a publicly listed company acquires all of the securities of a private company. The public company issues the shareholders of the private company a number of shares in the public company. It is sometimes referred to as a “back door listing”, a reverse merger, or a reverse IPO. An RTO typically results in a change of ownership for the public company, with the former shareholders of the private company obtaining a majority share of the public company.
Advantages of an RTO
No need for registration as the private company will acquire the publicly listed company by buying shares in the shell company. This does not require any registration which is required with an IPO.
Quicker than an IPO as the IPO process of registration and listing can take several months whereas a RTO can been completed in a few months or less.
Avoid expensive fees associated with setting up an IPO. The total cost of an RTO is a fraction of the cost of an IPO.
In many cases, it does not require that additional capital be raised and avoids further dilution of shares.
Gain entry into a foreign market.
Disadvantages of a RTO
Involves less market validation of than an IPO.
Misrepresented public shell companies. Some public shell companies present themselves as a possible vehicle for a private company to use to go public but they are not be as presented. Thorough due diligence is required to ensure the shell company is as advertised and not filled with liabilities and/or involved in litigation(s).
Potential weaknesses in the company’s management experience and record keeping.
It can pose risk to investors as unlike with an IPO, a RTO disclosure documents are not typically reviewed by the securities commission. It distributes investor protection.
Lower survival rates and performance compared to companies that go through a traditional IPO.
Liquidity issues. Following the RTO, the company needs to ensure that it has sufficient cash flow to deal with a possible stock slump.
A reverse takeover is a very common method in Canada- with approximately seventy percent of companies going public in Canada doing so through RTOs. It is viewed as an alternative to the traditional IPO of shares that mitigates execution risk and also provides access to the Canadian capital market.
If you are considering a reverse takeover as an option or looking for shell companies, Company Finder has resources and an experienced team of Advisors that will help you every step of the way. If you are interested, please contact us.
Are you interested to learn more about Company Finder's investment opportunities? Click here to book a call.
Best,
Liam Miller
COO of Company Finder