Reverse Takeover (RTO)

A reverse takeover (RTO) is a type of merger that private companies engage in to become publicly traded without resorting to an initial public offering (IPO). Initially, the private company buys enough shares to control a publicly traded company. The private company’s shareholder then exchanges its shares in the private company for shares in the public company. At this point, the private company has effectively become a publicly traded company. An RTO is also known as a reverse merger or a reverse IPO.

How a Reverse Takeover – RTO Works

Under a reverse takeover (RTO), a private company does not need to pay the expensive fees associated with setting up an IPO. However, the company does not acquire any additional funds through the merger, and it must have enough funds to complete the transaction on its own. While not a requirement of an RTO, the name of the publicly traded company involved is often changed as part of the process. Additionally, the corporate restructuring of one or both of the merging companies is adjusted to meet the new business design.

It is not uncommon for the publicly traded company to have had little to no recent activity, existing as more of a shell corporation. This allows the private company to shift its operations into the shell of the public entity with relative ease, all while avoiding the costs, regulatory requirements, and time constraints associated with an IPO. While a traditional IPO may require months or years to complete, an RTO may be complete within weeks.