Reverse mergers offer a compelling way for young, developing companies to come public. They are faster and more cost-effective than traditional, banker-backed IPOs. 

Behind the Reverse Merger: A public company with no business operations acquires an operating  private company. The public company changes its name and management to that of the private company, and now the private company has become public. Its really that simple.

What are the advantages of a reverse merger as opposed to a traditional IPO? The company can avoid paying the exorbitant fees that the investment banks charge for an IPO, it's faster (no roadshow, less SEC review of the filings), and it's often easier for a smaller company to go public through a reverse merger than by attracting a larger investment bank. This was very apparent  this year when the market was cruising toward its eventual 2009 bottom, investment banks virtually ceased all IPO activity while reverse mergers continued to come to market

So why go public at all? The downside of a reverse merger is that if your business plan does not succeed and you fail to attract investor attention, it will be impossible to raise money again through the issuance of shares, and all your faults and failures will be on public display through SEC filings. You also have the added expense of a transfer agents, accountants, auditors and attorneys. 

The upside is that it can provide potential liquidity for your early stage investors and you now have currency (your stock) with which to do acquisitions and potentially raise money through either secondaries or PIPE (private investment in public equity) offerings. 

Reverse mergers are not new to the markets in fact they have  a lengthy history. Armand Hammer brought his little company, Occidental Petroleum (OXY:NYSE), public in 1950 (after making millions selling pencils to postwar Russia) through a reverse merger. Ted Turner took his billboard company public in 1970 when he merged into publicly traded, failed TV company Rice Broadcasting, changed the name of the new public entity to Turner Broadcasting, and took over the company. 

Or Muriel Siebert, who took over the public furniture company, J. Michaels, in 1996, renamed it Siebert Financial (SIEB:Nasdaq), and her public company is now a famous financial services company. Other companies that have used the reverse merger vehicle to go public and then went on to fame and fortune include Waste Management (WMI:NYSE) and Blockbuster Video (BBI:NYSE), before it was acquired by Viacom (VIA.B:NYSE). 

Arguably the most famous reverse merger is Berkshire Hathaway (BRK.A:NYSE), the old-school Maine textile manufacturer that was taken over by Warren Buffett when he bought the controlling interest in the company and then merged his insurance empire into it. The only thing he didn't do was change the name. Other recent examples of recent reverse merger include Shengkai Innovations Inc (SKII), China Wind Systems Inc (CHWY), and Techprecision Corp (TPCS) to name just a few. Hundreds of private companies go public through reverse mergers every year.  

To be fair, a high percentage of reverse merged companies fail to take advantage of their public status and often choose to go back to being private. But this is not because the process is bad, but because, like with IPOs, or any area of life that touches the investing public, there are those who abuse and take advantage of the system.. 

When it comes to investing -- good, profitable, growing companies will eventually shine and succeed. For the individual investor, the beauty of the reverse merger process is that diligent home work can sometime uncover one of these gems before the investing public has found them, sometimes creating a compelling investment opportunity. 

The way to invest in reverse mergers is to find companies that have been through the process, but haven't t yet been touched by the larger banks and hence receive no analyst coverage and very little media coverage. This allows the companies to grow and enhance their stature before the street jumps on the stories. In other words, you can invest in legitimate, growing, perhaps even profitable companies that nobody knows about. But if they execute, the investment banks will come sniffing around when they smell the scent of M&A fees and secondary offerings. But for the moment, the untouched beauties may have room to rise.