Rewards and risks of financing through a HK reverse merger

The term “reverse merger” means that the investor involved in a private placement (i.e. the acquirer) uses its assets to subscribe for the newly offered shares of the issuer (i.e. the target company) and, on this basis, injects the assets into the target company and secures a controlling interest, thereby realising the acquirer’s reverse merger.

Enterprises subject to restrictions on initial public offerings (IPOs) mainly opt for reverse mergers to achieve a listing, e.g. real estate enterprises and securities companies. After encountering obstacles to listing through such means as REITs, IPO and A-shares, Wanda successfully acquired a 65% stake in Hengli and completed a reverse merger in Hong Kong. A reverse merger can allow an enterprise to first secure control of a listed company, and then, depending on the actual degree of maturity, gradually inject business into it.

Why Hong Kong?

The main markets available to an enterprise for a reverse merger include the A-share market, Hong Kong Stock Exchange (HKEx), the Singapore Exchange and US exchanges. When considering which market to choose, the enterprise must, based on its own immediate interests, consider such factors as the price of the shell, how clean it is, follow-up fundraising capabilities, the speed at which the assets can be injected, shareholder tax planning, success rate, timing of the transaction, etc.