Drawbacks of REVERSE IPO

Reverse takeovers always come with some history, and some shareholders. Sometimes this history can be bad, and manifest itself in the form of currently sloppy records, pending lawsuits and other unforeseen liabilities. Additionally, these shells may sometimes come with angry or deceitful shareholders who are anxious to "dump" their stock at the first chance they get. One way the acquiring or surviving company can safeguard against the "dump" after the takeover is consummated, is by requiring a lock-up on the shares owned by the group they are purchasing the public shell from, otherwise there very likely will be a stock dump. Other shareholders that have held stock as investors in the company being acquired pose no threat in a dump scenario because the number of shares they hold is not significant and, unfortunately for them, they are likely to have the number of shares they own reduced by a reverse stock split that is not an uncommon part of a reverse takeover. Possibly the biggest caveat is that most CEO's are naive and inexperienced in the world of publicly traded companies, unless they have past experience as an officer or director of a public company.
A major disadvantage of going public via a reverse merger is that such transactions rarely introduce liquidity to a previously private stock unless there is bona fide public interest in the company. Without decent analyst coverage, many reverse merger companies end up relegated to the OTC market (also called the pink sheets), and never end up giving holders of the formerly private company the liquidity they expect. While probably an overstatement, there is an adage on Wall Street that companies which use reverse mergers to gain a stock exchange listing or quotation are doing so not because it is convenient, but rather because it is their only real choice. Whether this sentiment is valid, it has a significant and adverse impact on the perception of reverse merger companies among Wall Street analysts and other investment professionals. In other words, whether you are a private company that is being talked into such a transaction by investment bankers or a retail investor who keeps getting calls from brokers trying to pawn off shelf company shares, buyer (and seller) beware.