Reverse Takeovers: The Unconventional Path to Going Public

Last Updated on April 16, 2025

TL;DR

• Reverse takeovers (RTOs) allow companies to go public by merging with a shell company that already has a listing
• Reverse takeovers can triple the size of the target shell company’s market capitalization
• Reverse takeovers are completed 50% faster (3-6 months) than an IPO (9-12 months) and 50-75% less expensive
• Private company shareholders typically retain stronger control through RTOs than traditional IPOs
• Key challenges include finding quality shell companies, limited investor awareness and post-transaction integration
• Success requires thorough preparation, experienced advisors and robust post-transaction support systems
• Modern RTOs have evolved into more sophisticated structures like SPACs while maintaining core advantages

Let’s face it: Traditional IPOs make for great headlines. But behind the scenes, many companies are taking a more discreet approach to going public that offers them greater control and flexibility.

When a private company wants to go public, it can either follow the traditional path of an IPO, or take a different route: the reverse takeover, or RTO. An RTO is when a private company buys a majority stake in a public company, effectively taking that company public without the usual process.

Unlike an IPO, where new shares are issued, a private company’s shareholders buy a majority stake in a public shell company that may still be listed, but which has little to no actual business operations.

It’s been a decade of explosive growth, and for good reason. RTOs take half the time of traditional IPOs, are far less costly, are more certain, and allow founders to maintain a greater degree of control. But it’s not all sunshine and rainbows – finding quality shell companies can be difficult, awareness among investors is not widespread, and regulatory requirements are constantly evolving.

In the sections that follow, we’ll explore everything you need to know about RTOs – whether you’re considering one for your business or simply trying to understand why this route to the public markets has become so ubiquitous.

What is a Reverse Takeover

While the front pages of financial news are filled with stories of traditional IPOs, reverse takeovers are following a very different route that is becoming increasingly popular for many private companies.

A reverse takeover (RTO) is a way for private companies to gain public status without following the traditional initial public offering (IPO) process. In its most basic form, a reverse takeover is when a private company acquires a controlling interest in a publicly listed company, effectively entering the public marketplace through the back door.

Unlike a traditional IPO, where a company remains private uses the public markets to issue and sell new shares to the public, an RTO gives the shareholders of the private company a majority stake in a publicly listed company. The public shell company (usually a company with very few real operations but still a public listing) acts as a vehicle for the private company to gain access to the public markets.

A reverse takeover works in a very different way than a traditional public offering:

1. The private company finds a suitable public shell company and negotiates a purchase agreement.
2. Shareholders of the private company receive newly issued shares of the public company through a share exchange.
3. The new shares represent a majority, usually 90% or more, of the resulting company.
4. The board of directors is replaced with management of the private company.
5. The company name and trading symbol are usually changed to reflect the new business.

While reverse takeovers are not unique to the tech industry, they are hot right now in the tech space and other emerging sectors where the traditional IPO process may be too expensive and time consuming. The RTO process is flexible and accommodates companies with non-traditional business models or shorter operating history that would be challenged in a traditional public offering.

The Step-by-Step Reverse Takeover Process

The reverse takeover process is a structured and flexible path that allows private companies to go public. Public companies have ready access to capital and are able to raise funds from a much wider group of public investors. This is one of the big advantages of a private company executing an RTO. While each RTO transaction is unique and has its own particular characteristics, the general steps outlined below are typical of most RTO transactions.

• Initial Preparation & Planning: Before the process even begins, the private company must conduct its own preparations. This includes financial audits, any necessary corporate restructuring, and getting the management team aligned with the RTO strategy. Throughout this process, the company must take a candid assessment of whether it is ready for the scrutiny of the public markets and fix any operational weaknesses.
• Identifying the Public Shell Company: Identifying the right shell company is a make-or-break moment. The management team of the private company (potentially working with financial advisors) will search for public shells.

They’ll need a clean balance sheet with no skeletons in the closet. The shell company should have minimal liabilities or legal exposure. This courtship can take anywhere from a few weeks to several months, depending on market conditions and the needs of the private company.

• Letter of Intent & Initial Agreement: Once the public company is found, both parties sign a letter of intent (LOI) that outlines the structure of the proposed transaction. The LOI is a non-binding agreement that sets the stage for negotiations. It will typically include the proposed exchange ratio that will be used to determine the number of shares that private company shareholders will receive. The LOI will also outline the timeframe required to complete the transaction.
• Due Diligence Phase: In a RTO, due diligence is a two-way street. The private company is doing its due diligence on the shell company while the public company is doing its due diligence on the private company. The due diligence process will likely include a thorough review of the financials of both parties. Contractual obligations and potential liabilities will be reviewed.

Intellectual property rights will need to be thoroughly vetted. The regulatory compliance history will need to be analyzed. Any outstanding litigation or disputes will need to be assessed.

• Definitive Agreement: After completing the due diligence, the parties negotiate and sign a definitive agreement outlining all the material terms of the transaction. The definitive agreement supersedes the LOI. It usually includes the final valuation and exchange ratio. Representations and warranties of both parties are documented.
• Regulatory Filings & Approvals: While the regulatory process for an RTO is less onerous than an IPO, it still requires a great deal of paperwork. In addition to the LOI, the parties must file a Form 8-K or a similar disclosure document relating to the transaction.

A private company must file audited financial statements. The new management team must disclose its details. The business plan and projections must be included and reviewed. All these documents are reviewed by the Securities and Exchange Commission. The appropriate stock exchange must approve continued listing of the new company.

• Closing of the Transaction: The reverse takeover transaction closes when all conditions precedent have been satisfied and all necessary approvals have been obtained. At closing, shareholders of the private company receive new shares issued by the public company.

The board composition changes as described in the agreement. The public company will typically change its name and ticker symbol. The management of the public company will typically be taken over by the management of the private company. After the deal is completed, the shareholders of the private company will own a majority of the shares of the public company.

• Post-Closing Integration: The work doesn’t stop at closing. The newly public company must integrate operations and set up a comprehensive investor relations program. This process includes implementing traditional public company practices. They must set up a financial reporting system that will meet the requirements of a public company.

To trade on an exchange, a company must have insider trading policies in place. Disclosure controls and procedures must also be designed.

The typical timeframe for a reverse takeover is between three to six months, which is a fraction of the time it takes to complete a traditional IPO, which can often take nine to twelve months or longer.

Advantages of Reverse Takeovers

Parameter	Reverse Takeovers (RTO)	Initial Public Offerings (IPO)
Average Duration	3-6 months	9-12 months
Cost	50-75% less than IPOs	Higher due to underwriting fees, legal costs
Regulatory Requirements	Generally fewer at initial stages	Extensive, with more stringent disclosures
Control Retained	Higher control by original owners	Possible dilution of control
Market Risk	Reduced, due to predefined terms of exchange	Subject to market conditions during launch

While the traditional IPO gets all the glamour, reverse takeovers offer substantial benefits that many private companies find irresistible when plotting their public market strategy.

Rapid Schedule to Public Listing

Perhaps the most attractive benefit of an RTO is the accelerated timeline. Unlike a traditional IPO, which tends to take 9-12 months to complete, an RTO can take as little as 3-6 months. This allows private companies to capitalize on market opportunities sooner rather than waiting months while their IPO moves through the pipeline.

Cost Efficiency

The cost savings of an RTO can’t be overstated. A traditional IPO can cost between $1-2 million in direct costs, and this number can easily increase to $5+ million for larger offerings when underwriting fees, legal fees, accounting, and roadshow costs are added. In comparison, an RTO can cost between $400,000-800,000 or 50-75% less than a traditional IPO.

Lower Market Risk

Traditional IPOs are subject to market risk during the pricing process. If market conditions are not favorable, a company may be forced to accept a lower valuation or pull its offering altogether after spending valuable resources preparing for the transaction. Reverse takeovers are less exposed to market risk because of the less dynamic nature of the transaction structure.

This reduced exposure to market forces gives more certainty to the entire going-public process and allows for more confident strategic planning.

Preservation of Control

Many private company shareholders can better preserve control in an RTO than they would in an IPO. In an RTO, the private company’s management will generally retain more voting control and be subject to fewer restrictions on their future activities.

In contrast, in an IPO the underwriters will often impose lengthy lock-up restrictions on insider selling, sometimes lasting 180 days or more. RTOs typically include more flexible lock-up arrangements that provide liquidity to founding shareholders and early investors sooner, while allowing them to maintain control of the publicly traded company.

Access to Alternative Capital Sources

Beyond the initial transaction, going public through an RTO provides existing shareholders with liquidity and opens the door to a wide range of additional potential capital-raising sources. These include:

• Secondary offerings to raise additional capital
• Convertible debt instruments with more favorable terms
• Stock-based acquisition opportunities
• Equity-based employee compensation programs

This wider access to alternative financing sources gives your company greater strategic flexibility to pursue growth initiatives at a lower cost than may be available to a private company.

Regulatory Efficiencies

While all publicly traded companies must eventually meet the same ongoing regulatory demands, the RTO process is less heavily regulated in its initial stages than the traditional IPO process. This results in procedural efficiencies that help the transaction move more quickly and at lower cost.

The reduced initial regulatory burden doesn’t mean avoiding accountability. It simply allows companies to come into compliance with the demands of public company status gradually, while already enjoying the benefits of being a public company. This gradual transition is typically less disruptive to core business operations.

Increased Company Profile as a Public Company

There’s an element of halo effect that comes with being a public company – no matter how you achieve it. The general perception is that a publicly traded company is more credible to customers, suppliers and potential partners. The publicly traded label is seen as a sign of stability and transparency, which is very important to those looking to do business with you.

Media coverage nearly always increases following a listing, which provides additional marketing benefits with no direct spend on promotion. Industry analysts may take the cue and begin coverage as well, further raising market awareness and potentially supporting a strong stock performance.

With a reverse takeover, the benefits of going public without the long development time that traditional IPOs require. It’s one way that companies can accelerate their growth, quickly gaining the visibility they need to drive their business forward. And that visibility comes with some very real benefits beyond just raising capital.

Challenges and Considerations of Reverse Takeovers

Advantages	Challenges
Faster timeline to public status	Finding quality shell companies
Cost efficiency	Limited investor awareness
Reduced market risk	Regulatory scrutiny
Preservation of control	Post-transaction integration issues
Access to alternative capital sources	Shareholder composition issues

While the advantages of RTOs may appear straightforward, the hidden obstacles can make this smooth ride bumpy if you’re not aware of them.

While reverse takeovers have their benefits, they also have unique challenges and considerations that private companies need to carefully consider before embarking on this path to a public listing. By understanding these potential roadblocks, companies can better prepare to address them.

Shell Company Quality Concerns

Shell Company Quality Concerns Finding a suitable public shell is perhaps the most critical challenge. The private company inherits the shell’s history—including any undisclosed liabilities or regulatory issues. Due diligence must thoroughly investigate litigation history, tax compliance, regulatory violations, shareholder disputes and disclosure accuracy.

Valuation Complexities

Determining appropriate valuations presents significant challenges. Unlike IPOs where market forces establish pricing, RTOs require direct negotiation between private companies and shell shareholders. Tensions often arise regarding the value of the public listing status, treatment of existing shareholders, control premiums and non-operating assets.

Shareholder Composition Issues

When acquiring a public shell, there may be existing shareholders that do not match the ideal profile of the private company. Legacy shareholders may be problematic for governance or liquidity. These issues can come from short-term investors, powerful block holders, shareholder lists out of date and retail investors who don’t know the new company.

Limited Investor Awareness

While a company may gain public status, it will typically receive far less investor attention than companies that complete traditional IPOs. No road show process and no support of the underwriter means that the new public company must start from scratch to build market awareness. The cost of building market awareness must be factored into the overall transaction budget. Finally, the reverse merger is not a vehicle for immediate access to capital through the stock market, especially if the shell company is new or is from a different industry.

Regulatory Scrutiny Concerns

While reverse mergers typically receive less initial regulatory scrutiny than an IPO, regulators have put more scrutiny on these transactions in recent years to avoid abuse. The Securities and Exchange Commission and other government agencies have implemented additional review procedures for companies that go public through a reverse merger.

These challenges include additional filings, enhanced scrutiny of financials, special disclosure requirements, and trading restrictions. While these new rules have narrowed the regulatory advantages of a reverse merger over a traditional public offering, they have not eliminated them altogether.

Liquidity Limitations

A significant number of companies face liquidity challenges following an RTO. Without the trading volume an IPO provides, the company may experience limited daily trading, wider bid-ask spreads, and difficulty attracting institutional investors. Managing these liquidity issues requires committed investor relations work, and it can take 12-24 months to achieve meaningful results.

Perception Issues

While RTOs have become more widely accepted, many still perceive them as a negative. Some market participants view RTOs as an indication that a company cannot meet traditional IPO standards or is trying to find a shortcut.

It can affect:

• Analyst coverage opportunities
• Institutional investor interest
• Media coverage quality
• Customer and partner relationships

Companies must prepare to develop messaging that clearly communicates the strategic rationale for choosing the RTO route to address the risk that negative perceptions may arise.

Post-Transaction Integration Challenges

Many companies underestimate the operational changes that will be required after listing. “When a company goes public, they have to change their entire mindset about how they operate,” says governance expert Michael Richards.

There are always issues that can be overcome, but they will depend on the company in question, the sector and the market it operates in. The issues will also depend on the requirements for the next steps. Success will depend on preparation, realistic expectations and professional advice in structuring the transaction. Reverse takeovers are not for all companies, but they can be successful for some companies in the right circumstances.

Examples of Successful Reverse Takeovers

Tesla and SolarCity: A Tech Industry Success

Tesla’s acquisition of SolarCity in 2016 is a great example of a reverse takeover. The company acquired SolarCity for $2.6 billion in order to expand its renewable energy business. SolarCity was a leader in the solar panel manufacturing sector and the acquisition allowed Tesla to increase its presence in the sector. A reverse takeover was the best vehicle to use in this transaction since it avoided the need for an IPO and allowed Tesla to quickly integrate with SolarCity’s operations.

Burger King and Justice Holdings: A Food Industry Success

In 2012, Burger King, the privately held fast-food chain, executed a reverse takeover to acquire Justice Holdings, a publicly traded holding company. This acquisition allowed Burger King to become a publicly traded company, eliminating the need for a time-consuming and costly initial public offering (IPO). The reverse takeover was a strategic way for Burger King to raise capital and expand its global footprint. By taking Burger King public, the company was able to make itself more accessible to investors and raise the capital it needed to fund its growth ambitions.

Nikola and VectoIQ: An Automotive Industry Success

Nikola, a private electric vehicle company, recently completed a reverse merger with VectoIQ, a special purpose acquisition company (SPAC). The deal, which is valued at over $700 million, helped Nikola go public and access the capital markets to fund its manufacturing plans. The reverse takeover also gave Nikola access to VectoIQ’s automotive expertise, allowing it to enter the public markets more quickly and efficiently. This is just one example of the strategic benefits of reverse mergers, especially for capital-intensive industries like automotive manufacturing.

Failed Examples of Reverse Mergers

China Changjiang Mining & New Energy Co: An Energy Industry Failure

In 2011, China Changjiang Mining & New Energy Co a publicly traded company, completed a reverse merger with a private company. However, the deal turned out to be a failure and it collapsed due to various regulatory and compliance issues. The Securities and Exchange Commission (SEC) halted trading in the company’s stock, citing concerns over the accuracy of its financial statements.

Upon the notification, the company’s stock was delisted by the stock exchange. This led to the reverse merger failure. This reverse merger attempt exemplifies the risks involved with reverse mergers. It highlights the importance of regulatory compliance and transparency. It serves as a warning to private companies that are considering a reverse merger as a means of accessing the public markets. It also serves as a reminder of the importance of due diligence and thorough financial disclosure.

Role of Virtual Data Rooms and SmartRoom in RTOs

RTO Stage	SmartRoom Feature	Benefit
Due Diligence	Secure document management	Ensures confidentiality and integrity of sensitive data
Document Exchange	ZIP Upload, Version Control	Facilitates efficient document handling and version tracking
Post-Transaction Integration	Q&A Module, Notification Center	Enhances communication and collaboration post-RTO
Regulatory Compliance	Comprehensive Audit Trails	Supports compliance with regulatory requirements

The glossy brochure says the RTO transactions will go smoothly, but the messy document management can kill the deal with the right tools.

Virtual data room (VDR) is the core of reverse takeovers. It provides secure management of documents throughout the reverse transaction process. SmartRoom has some specific features to manage reverse takeovers.

• Due Diligence Management: RTOs typically include extensive back and forth due diligence, with thousands of documents exchanged between parties. SmartRoom can handle the volume while ensuring the security.
• Security Protections: Once you go public, you’ll need to take extra precautions to protect the information in SmartRoom. The platform employs multi-factor authentication via SMS or email, granular permission controls, detailed activity logging, and even watermarking that can be extended to video files.
• Document Organization: SmartRoom features customizable folder structures, full-text search, version control, and automatic indexing. It also includes a character counter, which is useful when naming files that are close to the system limit. This can help avoid technical issues during an important project.
• Multi-Party Collaboration: RTOs involve multiple parties with different information needs. SmartRoom has the ability to set custom access rules, Q&A modules with @mention functionality, and notification systems.
• Transaction Acceleration: SmartRoom accelerates transactions with features like ZIP Upload for rapid data room population and staging functionality for efficient workflow management. SmartRoom’s tagging system with enhanced visibility options (public, private, or restricted) organizes documents without compromising confidentiality.
• Compliance Support: SmartRoom helps maintain regulatory compliance through document preservation, information controls, comprehensive audit trails, and consistent organization. The platform’s activity tracking “provides the documentation we need to demonstrate appropriate information management throughout the RTO process,” says compliance officer Thomas Grant.
• Analytics and Reporting: SmartRoom’s enhanced reporting capabilities, including the “Profile Synopsis by Company” report, allow transaction managers to analyze activity patterns and identify which partners need additional support during critical phases.

As RTOs continue to evolve in form and regulation, sophisticated VDR platforms like SmartRoom remain an indispensable tool for successful transactions.

Preparing for a Reverse Takeover

A successful reverse takeover requires careful preparation long before a company engages with a potential shell. Companies that take the time to get ready for a reverse takeover will experience a smoother transaction, fewer surprises, and stronger post-closing performance.

• Strategic Readiness Assessment: Companies need to be honest with themselves about their readiness to be a public company. Many companies rush into public status without considering the operational implications. There should be clear strategic reasons for going public.
• Financial Readiness: You must have the financial resources to support your business plan. This includes having audited financial statements, interim financial statements, segment reporting, and reasonable financial projections. Most companies grossly underestimate the time and resources required to upgrade their financial systems to support public reporting.
• Operational Readiness: Your operations must be ready for the public eye. This means having an enhanced corporate governance structure and IT systems in place to support reporting, communications, and cyber security.
• Legal Readiness: Legal structures often require changes before an RTO. This includes simplifying the corporate structure, addressing minority interests, resolving litigation, and reviewing contracts for change of control provisions.
• Human Capital Preparation: Management teams need experience running a public company. Key positions to fill or upskill include CFO, general counsel, and investor relations. Employee groups need to be familiar with the new restrictions and requirements.
• Selecting the Right Transaction Partners: Partner with advisors that have specific experience with RTOs, not just general capital markets expertise. Working with an experienced team helps navigate the transaction process and the critical first year as a public company.

Companies that invest the time to prepare properly before embarking on an RTO tend to have smoother transactions, fewer post-closing surprises, and stronger early quarters as a public company. While this investment may sometimes seem to slow the transaction process, it actually accelerates the achievement of the strategic objectives that led to the decision to go public.

The Future of Reverse Takeovers

The RTO landscape continues to evolve as market conditions, regulations and company needs change. Understanding these emerging trends will allow companies to assess whether RTOs remain an appropriate public market access strategy in the coming years.

• SPAC Evolution: SPACs revolutionized reverse mergers during 2020-2022. While they face heightened scrutiny, they will continue to be a major player, albeit with more sustainable structures that incorporate targeted capital raises and improved sponsor-investor alignment.
• Regulatory Evolution: SEC has introduced more robust disclosures and a higher bar for RTOs, which has narrowed the gap between RTOs and traditional IPOs and fostered increased investor confidence.
• Global Reach: RTOs have become increasingly global, with more cross-border transactions as companies seek out listing venues beyond their domestic exchange.
• Technology Advancements: Platforms now support AI-assisted due diligence and automated compliance. For example, SmartRoom has enhanced workflow features and security capabilities.
• Industry-Specific Adaptations: There are now RTOs that are industry-specific in nature, such as earnouts based on milestones for life sciences and IP protection for tech companies.
• Economic Cycle Impacts: RTOs tend to be most popular when the traditional IPO markets are challenging, but companies need capital or liquidity.
• Post-Transaction Support: Today’s RTOs have evolved to include post-listing support, such as analyst coverage, market making provisions and investor relations support.

The reverse takeover trend will continue, as it remains one of the most flexible and efficient paths to the public market for companies with the right profile and realistic ambitions. As regulatory requirements evolve and structures become more sophisticated, the fundamental benefits of RTOs – speed, efficiency, and higher transaction certainty – will continue to ensure the RTO remains an integral part of the public equity capital markets.

So What Next?

Reverse takeovers are a viable public market alternative to traditional IPOs for those companies that want a public home on their own terms. While they’re not right for everyone, the speed, cost and control they offer will continue to ensure the RTO remains a relevant part of the capital markets.

The RTO landscape continues to evolve – from relatively rare transactions to more structured and sophisticated models used by companies of all sizes, including large enterprises such as Dell Technologies. The recent growth in SPACs has helped legitimize RTOs and create new variations.

Companies considering an RTO should understand that the transaction is not the finish line, but rather the start of life as a public company. To be successful, you must be adequately prepared, have the right advisors, and invest in post-transaction resources and infrastructure, including compliance and investor relations.

As technology platforms such as SmartRoom continue to improve the process of managing these complex transactions, RTOs should be given serious consideration alongside the traditional paths to the public markets.