Reverse merger and reverse recapitalization

In a reverse merger a private company combines with a public company, usually a listed biotech whose programs have failed and whose value is largely cash and the listing. The private company's shareholders end up with control. For accounting purposes the private company is the acquirer, so its historical financial statements become the historical statements of the combined public company.

If the public company is not a business under ASC 805, which is common when it has wound down operations, the transaction is a reverse recapitalization: no goodwill, no fair-value step-up, and the net assets of the shell are recorded at their carrying amounts. Transaction costs are charged to equity. If the shell still has a business, it is a business combination with purchase accounting applied to the shell's assets.

The private company inherits the public company's reporting obligations immediately, including PCAOB-standard audits of its own history, which is why reverse mergers reward companies whose books were already audit-ready.