Life Sciences Reverse Mergers Go Global: Is it the Path for Your Company?

Source: cooleyma.com — Posted March 22, 2023

With the US initial public offering markets continuing to remain largely closed, and special purpose acquisition company combinations being costly and complex, there's a new kid in town for foreign companies looking to go public in the US: reverse mergers. We've seen a material increase in reverse merger transactions — particularly with cross-border elements, and we expect many more will follow given current market conditions.

Cross-border reverse mergers are gaining momentum, particularly in the life sciences sector, due to the increasing number of US public companies with healthy cash levels but poor or failed product pipelines, proving to be a viable path to going public in the US in the near term.

In a nutshell, a cross-border reverse merger is a transaction where a private or public foreign company merges or combines with an operating US public company, with the shareholders of the private or public foreign company receiving stock in the US public company as transaction consideration — and typically owning a majority or greater controlling stake in the combined entity.

10 Key Points to Consider

• Structuring — Pre-plan with accountants and legal advisers to determine deal structure certainty. Competition is stiff.
• Certainty — Your largest shareholders, directors and officers will be expected to sign voting agreements or irrevocable undertakings.
• Tax-free basis — Often cross-border reverse merger transactions can be accomplished on a tax-free basis with early tax adviser involvement.
• Valuation and consideration — Your valuation will be agreed upon at the time of announcement, unlike pricing in an IPO.
• Timing — A reverse merger can be completed in as little as three months vs. four to six months for a traditional IPO.
• Due diligence and integration — Be prepared for a heightened due diligence process as you may be taking on liabilities of the US public company.
• Financing — Consider your run rate post-closing and whether you need a PIPE financing alongside the transaction.
• US public company readiness — Understand the US regulatory and shareholder litigation landscape.
• Financial readiness — You will need one to two years of audited financial statements compliant with US audit requirements.
• Cost — While faster than an IPO, a reverse merger is not necessarily cheaper due to significant banker fees.

A cross-border reverse merger transaction might be your path for going public in the US in the near term. Deal certainty and speed in execution are key to a successful cross-border reverse merger process.