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2

Reverse Merger

Reverse Merger, also known as a reverse takeover, is when we merge what is called a public shell (also
referred to as a public shell corporation or public shell company) with a private business entity. A Reverse
Merger is a transaction where a private company elects to merge with a public company in order to
become public without waiting through what could be a lengthy filing process with the SEC and FINRA.
The shareholders of the private company purchase control of the public shell corporation to merge them
together.
After merging the active business enterprise with the public shell company, the result is a public
company with an active business in it. The shareholders now own a majority of the shares in the public
company and control the board of directors.
The old public shell then changes its name to the name of the private business that was reverse merged in
during the reverse merger. This technique is called a Reverse Merger Public Shell combination.
Appropriate For: Reverse mergers are appropriate for companies that don't need capital quickly and
that will experience enough growth to reach a size and scale at which they can succeed as a public entity.
Minimum sales and earnings to reach this plateau are $20 million and $2 million, respectively.
Preparation for a Reverse Merger or Public Shell Merger:
Locate a Suitable Public Shell - Public shells can often be found by consulting with securities law firms
or CPA - Audit firms that deal with public companies. Go Public Institute owns a number of public
companies available for merger.
It is important to start with a clean shell: Due diligence on the public shell cannot be over emphasized,
advice from the securities counsel, auditors, and a financial consultant should be utilized. As mentioned,
many shells are created for the express purpose of merging with a private company. These shells have no
predecessor entities, and, as a result, little baggage in the way of a business failure or other skeletons in the
closets.
Comprehensive Business Plan Potential investors, public shareholders, auditors, securities counsel,
brokers and market makers will want to see a well documented business plan.
Strong Management Team Public investors demand strong management teams.
Convincing Marketing Plan Public companies need the ability to show good sales and earnings growth.
Product or Service Public companies should be able to develop strong or dominant position in their
business segment.
Financial Audits SEC qualified audited financial statements for your last two fiscal years.



3

Experienced Securities Counsel The attorney must be qualified to deal with regulatory compliance, and
the ongoing reporting requirements of all public companies.
Have Public Company Experience: The company should have at least one person in senior management
that has significant public company experience. Financing consultants, such as Go Public Institute, can
often assist management in the complex issues of being a public company and maintaining a good
relationship with the financial community. In fact, many actually have a couple of shell corporations and,
upon request, can manufacture a clean public shell. A made-to-order shell without the baggage of a
business failure in its background can sometimes be the way to go, but there's often a cost involved. We
will most likely end up with the financing consultants as minority shareholders in the new company,
holding between 2 percent and 5 percent. However, in almost any reverse merger transaction, the
principals of the shell company keep a small equity position in the company going forward. Therefore,
this surrender of equity is simply a cost of doing business.
Devise your financing strategy: A reverse merger is an indirect route to raising capital. Entrepreneurs
must first consider how additional capital will be raised after the deal is done. An experienced financial
consultant, like Go Public Institute, can be very beneficial in this area.
Process:
In a reverse takeover, shareholders of the private company purchase control of the public shell company
and then merge it with the private company. The publicly traded corporation is called a "shell" since
all that exists of the original company is its organizational structure. The private company
shareholders receive a substantial majority of the shares of the public company and control of its board of
directors. The transaction can be accomplished within weeks. If the shell is an SEC-registered company,
the private company does not go through an expensive and time-consuming review with state and
federal regulators because this process was completed beforehand with the public company.
The transaction involves the private and shell company exchanging information on each other,
negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell
company issues a substantial majority of its shares and board control to the shareholders of the
private company. The private company's shareholders pay for the shell company by contributing
their shares in the private company to the shell company that they now control. This share exchange
and change of control completes the reverse takeover, transforming the formerly privately held
company into a publicly held company.
Upon completion of the reverse merger, the name of the shell company is usually changed to the name of
the private company. If the shell company has a trading symbol it is changed to reflect the name change.
An information statement, called an 8-K, must be filed within 4 days of the closing. The 8-K describes
the newly combined company, stock issued, information of new officers and directors, a full description of
the business, and financial statements audited to US GAAP standards. The 8-K must disclose the same
type of information that it would be required to provide in registering a class of securities under the
Securities Exchange Act of 1934.
If the shell company is listed on the OTC Bulletin Board, the registered or free trade shares can continue
to trade. The company can do a private placement immediately. To trade new shares offered by the public
the newly combined public company must first register the shares with the SEC. This process takes three


4

to four months and normally requires filing a Registration statement with the SEC by filing an S-1
registration statement.
Requirements Necessary to Close a Reverse Merger or Public Shell Merger
Business plan of private company with sufficient information to complete and file the required 8-K
with the SEC.
Management information, including completion of the "Officer and Director Questionnaire," for
all Officers and Directors designated by the private company merger partner.
Agreement on structure and terms of merger.
Letter of intent with escrow payment made to the law firm that is handling the transaction and
acting as escrow attorneys. (This must happen for the public company to cease negotiations with
other merger prospects.)
Audited Financial Statement, conformed to US, GAAP for the private merger partner. The audit
statements of the private company have to be consolidated with the public company's financial
statements.
Agreed merger fee in escrow with the securities attorney representing the merger partner.
Consent from the majority, preferably 100%, of existing shareholders of the private company to
merge or exchange their shares for shares of the public company.
Agreement for the Officers and Directors of the public shell to be replaced with the Officers and
directors designated by the private company merger partner.
List of all shareholders in the private company that will make the share exchange.
Number of shares to be outstanding post merger, and a complete breakdown of share ownership
post merger. Note: It is often necessary for the public shell to do a reverse split and/or cancel
shares owned by the affiliates of the public share prior to completing the merger.
Agreement on state the company will be domiciled in post merger.
Satisfaction of warranties and representations between public shell and merger partner.
Designation of securities attorneys and SEC qualified auditors that will represent the private
merger partner.
Preparation of the share exchange agreement, stock purchase agreement, definitive merger
agreement, and all other documents necessary to complete the merger.
Final preparation of the 8K that is required to be filed with the SEC within 4 days of closing the
merger. The 8-K must disclose the same type of information that it would be required to provide in
registering a class of securities under the Securities Exchange Act.


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CLOSED REVERSED MERGES BY
YEAR
0
20
40
60
80
100
120
140
160
180
2000 2001 2002 2003 2004 200S

Examples of Reverse Merger:
1. The corporate shell of REO Motor Car company, in what amounted to a reverse "hostile" takeover, was
forced by dissident shareholders to acquire a small publicly traded company, Nuclear Consultants.
Eventually this company became the modern-day Nucor.
2. One of the Dot Com fallen angels, Rare Medium (RRRR), merged with a lackluster refrigeration
company and changed the entire business. This was a $2 stock in 1998, which found its way over $90
in 2000.
3. In 2002, RAE Systems went public in a reverse merger at $0.20 a share. As of this writing in early
2006, the stock was trading at around $4.00 after reaching a high of $ 9.50
4. On Feb 2007, CKX, formerly Sports Entertainment, a stock trading at the 5-10 cent level, announced
a reverse merger with Elvis Presley Enterprises, which controlled all the rights to Elvis Presleys estate.
Since then they also announced a deal with the producers of American Idol. Now the stock is trading at
$26.64 and has a $2 billion market cap.


6

Going Public, Chinese Style:
Here's how it works. The Chinese business is typically acquired by a U.S. shell company that is worthless,
except for one thing: It's publicly traded. The American board then resigns; the Chinese board takes over,
changes the company's name, and issues new stock to hedge funds and other new investors, raising
millions of dollars in fresh capital. One example: Sinovac Biotech Ltd. (SVA), a respected Beijing-
based maker of vaccines, executed a reverse merger in 2003 and subsequently raised $12 million..
REASONS: One reason is simple: They have few other options. Small companies in the country's rust belt
or in industries that aren't sexy are unlikely to draw the interest of the venture capital and private equity
investors swarming over China. Plus there's a two-year wait for a listing on the booming Shanghai or
Shenzhen stock exchanges. For more and more Chinese companies, a reverse merger is faster and less
onerous than an IPO. Since 2005, more than 150 Chinese companies have taken the route of reverse
merger.
Another reason Chinese companys favor these deals is that there's less interference from investors.
Reverse mergers are usually followed up with a private placement. The hedge funds that typically buy
these shares are content to allow management to continue operating unfettered, whereas private-equity
outfits would typically demand a greater say in decision making, along with board seats.
1.WOLLEMI MINING CORP. Announces Completion of Reverse Merger With Owner of
Leading Chinese Footwear Companies -:
Wollemi Mining Corp. (OTCBB: WOLI) announced today the completion of a reverse merger with the
sole shareholder of Peakway Worldwide Limited, whose operating subsidiaries design, manufacture and
sell their own branded and moderately priced casual sports, athletic, outdoor, business and travelling series
footwear -- primarily for women -- throughout China and South America. Domestic sales are largely under
the widely known brand name "Baopaio" (or "Bepure"). These operating subsidiaries -- with nearly 600
employees and three production lines -- produced more than 2.2 million pairs of shoes and approximately
$20 million in sales in 2008, and now constitute the primary operations of Wollemi Mining Corp. which,
pending required approvals plans to change its name to Pacific Bepure Industry Inc. The Company is
now headquartered in Jinjiang City, often referred to as the "footwear capital" of China, which has
emerged as the world's largest consumer and exporter of shoes.
Transaction:
In connection with the transaction, Wollemi Mining issued 10.5 million shares of common stock or
about 70% of its issued and outstanding shares to the owner of Peakway, in exchange for 1,000
shares of Peakway. Immediately after giving effect to the exchange, Wollemi had 15 million shares
outstanding.



7


2.China JO-JO DRUGSTORES completes reverse acquisition -:
China Jo-Jo Drugstores, Inc. (the "Company") announced the completion of a reverse merger
transaction on September 17, 2009, with Renovation Investment (Hong Kong) Co Ltd through which
the Company acquired control of Renovation's retail pharmacy chain business in the People's Republic of
China. On September 17, 2009, the Company completed a share exchange transaction with Renovation
Investment (Hong Kong) Co., Ltd. ("Renovation HK") a Hong Kong company, and Renovation HK
became a wholly-owned subsidiary of the Company. Renovation HK is a holding company that, through
its wholly-owned PRC subsidiary, Zhejiang Jiuxin Investment Management Co., Ltd. ("Jiuxin
Management"), controls three PRC companies, namely Hangzhou Jiuzhou Grand Pharmacy Chain Co.,
Ltd. ("Jiuzhou Pharmacy"), Hangzhou Jiuzhou Clinic of Integrated Traditional and Western Medicine
General Partnership ("Jiuzhou Clinic"), and Hangzhou Jiuzhou Medical & Public Health Service Co., Ltd.
("Jiuzhou Service"), by a series of contractual arrangements.
Transaction:
On the closing date, the Company issued 15,800,000 of its common stock to Renovation HK's
stockholders in exchange for 100% of the capital stock of Renovation HK. Prior to the share
exchange transaction, the Company had 4,200,000 shares of common stock issued and outstanding.
After the share exchange transaction, the Company had 20,000,000 shares of common stock
outstanding and Renovation HK's stockholders owned 79% of the issued and outstanding shares.
The management members of Renovation HK became the directors and officers of the Company.
3. GLOBAL SOURCES, a China focused business to business play, reversed merged with asset
shell FAIRCHILD. As of this writing; it has a market capitalization of $430 million, $50 mn in cash,
no debt and $22 mn in EBITDA.
Transaction:
Global Sources exchanged 100 % of its shares for a 95 % stake in Fairchild (Bermuda) Ltd. After the
share exchange, the stockholders of The Fairchild Corporation will own 1,183,081 shares of the
26,152,308 issued shares of Global Sources.






8

Advantages:
Increased Valuation: Typically publicly traded companies enjoy substantially higher valuations
than private companies.
Capital Formation: Raising capital is usually easier because of the added liquidity for the
investors, and it often takes less time and expense to complete an offering.
Acquisitions: Making acquisitions with public stock is often easier and less expensive.
Incentives: Stock options or stock incentives can be useful in attracting management and retaining
valuable employees.
Financial Planning: Public company stock is often easier to use in estate planning for the
principals. Public stock can provide a long term exit strategy for the founders.
Reduced Costs: The costs are significantly less than the costs required for an initial public
offering.
Reduced Time: The time frame requisite to securing public listing is considerably less than that
for an IPO.
Reduced Risk: Additional risk is involved in an IPO in that the IPO may be withdrawn due to an
unstable market condition even after most of the upfront costs have been expended.
Reduced Management Time: Traditional IPOs generally require greater attention from senior
management.
Reduced Business Requirements: While an IPO requires a relatively long and stable earnings
history, the lack of an earnings history does not normally keep a privately held company from
completing a reverse merger.
Reduced Dilution: There is less dilution of ownership control, compared to a traditional IPO.
Reduced Underwriter Requirements: No underwriter is needed: (a significant factor to consider
given the difficulty companies face in attracting an investment banking firm to commit to an
offering.)
While the process of going public and raising capital is combined in an IPO, in a reverse takeover,
these two functions are separate. A company can go public without raising additional capital.
Separating these two functions greatly simplifies the process.
The shell company can offer a Tax shelter to the private company




9

Drawbacks:
Reverse stock splits are very common with reverse mergers and can significantly reduce the number of
shares owned by stockholders.
Many chief executive officers (CEOs) of privately traded companies have little or no experience running a
publicly traded company.
Many reverse mergers do little of what is promised and the company ends up trading on the OTC bulletin
board and providing shareholders with little to no additional value or liquidity













Disclaimer:
The views expressed in this research accurately reflects the personal views of the analyst(s) and the Company about the subject securities or issuers
and no part of the compensation of the analyst(s) was, is , or will be directly or indirectly related to the specific recommendations or views in this
research. This document is provided only for assistance and is not intended to be and must not alone be taken as a basis for and investment
decision. Nothing in this document shall be constructed as investment or financial advice and nothing in this document should be constructed as an
advice to buy or sell or solicitation to buy or sell the securities of the company referred in this document. In preparing this research, we did not take
into account the investment objectives, financial situation, needs of the readers. The investment discussed and views expressed may not be suitable
for all investors. Before making an investment decision on the basis of this research, the readers need to consider, with or without the assistance of
a personal advisor, whether the advice is appropriate in light of their particular situation, objectives and needs. There are risks involved in
securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. Opinions expressed are
subject to change without any approval notice. The Company reserves the rights to make any modifications and alternations to this statement as
may be required from time to time without any prior notice.
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