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Something to consider when evaluating a potential RTO opportunity is that according to Investopedia:
“RTOs have often been referred to as the poor man’s IPO mostly due to studies showing that companies that go public through a reverse merger generally have lower survival rates and performance compared to companies who go public through a traditional IPO.”
Conclusion:
A Reverse Takeover is a type of merger where the private company becomes publicly traded without needing to go through an initial public offering. This process comes with its advantages and has clear motives for private cannabis companies to consider when looking to go public. Advantages include reducing time and saving money, liquidity and exposure, and potential higher evaluations. Of course, there are negative aspects that should be considered as well such as shell company problems, potential pump and dump schemes, and regulatory compliance. Thanks for tuning in this month. Hopefully, you will be better informed the next time you come across a privately held cannabis company considering to go public via an RTO.
Regulatory compliance - As we had discussed in our March edition surrounding IPO’s there are additional moving pieces that need to be accounted for once a company moves from being private to public. Some of the hurdles that a company may face in going public include the legal work associated such as financial disclosures. On top of this, the regulations for financial filings and reporting are costly and may even require bringing on a new investor relations department to handle this. One concern that many have is the potential shift in focus that can occur where the short term success tends to trump the long-term growth as management tends to get scrutinized, thus pressuring them to do what is in the immediate investors best interest.
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