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Taking the easy way out isn’t only reserved for doing tasks that are less than desirable (like shoveling snow off the driveway but then deciding you’re better off just making tire tracks) or attempting to put an argument with the in-laws to rest—they also have to do with finances. In the world of money, many companies look for easy ways to grow their businesses and make more money quickly. In an effort to bypass rules and regulations, RTOs come into play. But for those rule-followers, IPOs are here to stay.

What is an RTO?

An RTO, otherwise known as a reverse takeover, is when a private company merges together with a public company in an effort to become publicly traded. An RTO allows companies to bypass an IPO (initial public offering) by purchasing enough stocks of a public company that they gain majority control of an already public company. Once the private company’s shareholders exchange their stocks for stocks in the public company, they have successfully completed an RTO.

An RTO is sometimes seen with international companies looking to gain access to the United States stock market. When an international private company purchases enough shares in a public United States company, they then have access to the United States’ stock marketplace.

Pros and Cons of an RTO

There are several pros and cons of an RTO. Like most things, the easy way out doesn’t always equal success (unless you’re really good at what you do).

Pros

  • Timeliness: Engaging in an RTO is a quicker process to going public on the stock market than an IPO. Think a few weeks versus a few months.
  • More Guarantee: Because the IPO process is so long, many companies have found greater success in going public through an RTO than an IPO.
  • Increased Growth: When a company goes public they have more access to growth as stock offerings equate to more capital for the company.

Cons

  • Public Risk: Intentions are everything. Stakeholders need to consider the reasons why a public company would undergo an RTO with a private company.
  • Lack of Resources: Playing in the public market is a whole new ballgame. Big wigs in private companies have barriers to overcome when beginning to lead a newly public company.

What is an IPO?

An IPO, more commonly known as an initial public offering, is a journey a public company takes to offer stocks or shares in a company to the public—pretty self-explanatory. An IPO allows public companies to raise money and generate interest for the company through stock options. Before a company is allowed to do an IPO, they are private. This is why companies often use the RTO method to bypass the hurdles of an IPO. The SEC (The United States Securities and Exchange Commission) has a plethora of rules and regulations that need to be followed by companies in order to engage in an IPO, however, it’s worthwhile if the company is looking to increase capital and get in the hands of public shareholders.

Pros and Cons of an IPO

While an IPO isn’t as risky as an RTO, there are both pros and cons to this offering.
Pros

  • Make Money: Going public allows companies access to raising even more money.
  • Growth: Going public is a big deal. An IPO allows companies to have increased exposure and generate more brand/company awareness.
  • Transparency: Public companies are required to report their growth to the public. An IPO increases the company’s transparency to the public and its shareholders.

Cons

  • Timeline: Unlike an RTO, an IPO takes a long time—several months—to achieve.
  • Costliness: Engaging in an IPO is costly, as there are legal and accounting costs associated with going public.
  • Transparency: While transparency is a pro for an IPO it can also be a con if the business has shady finances. Since public companies are required to report on their earnings, they are unable to “get away” with indescrepencies.

What to Look For to Make Money

Research is key when making the decision of whether or not to invest in a company that went through an RTO to go public. As mentioned above in the cons section of RTOs, the companies that private companies go into merges with can be “dirty”—meaning that they have had money, leadership, and other problems in the past. Do your due diligence and personally vet companies that did a reverse merger before investing your hard-earned dollars in those companies.

Dear Retail provides retail investors content, reports, and insights into the small-cap market.  Our articles range for experienced and novice investors: educational, market updates, and company deep dives.  You can read more of our articles here.

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