Reverse Merger Tip of the Week: Limited Float

Very often post-reverse merger companies have very few shares available to trade  (the number of tradable shares is called the “public float”).  Immediately after the merger, almost all the shares are held by the owners of the formerly private company - call these “owner’s shares.”  At least initially, none of these shares can trade.  Thus, the trading market is at first limited to those shareholders, if any, who held free-trading shares in the shell prior to the merger.

In most transactions, some of the owner’s shares are registered with the SEC almost immediately after the merger so that they are available to trade.  Some of those shares will be contractually locked up for various reasons and not available to trade immediately, but the rest will be released to help build the public float.  Nevertheless, the fact is that trading in shares of a shell whose stock was trading before the merger is very limited immediately after the merger.  And even after any owner’s shares are registered, they are not released into the market that quickly.

The situation is more pronounced (thought, ultimately, equally unimportant) following a merger with a nontrading shell.  The immediate trading market after a merger is not really relevant long-term.  But the perception is that the lack of trading following a merger with a nontrading shell is a negative to those seeking to go public. In the end, though, “real” trading takes time to develop whether a merger is with a trading “legacy” shell or a nontrading Form 10 shell. Each transaction is different and the parties’ needs will drive the choices to be made. But understand that patience is the key in working to build trading following any reverse merger.

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