WHAT IS A SHELL COMPANY?
A shell is a company that is incorporated, but generally has no significant assets or business operations. Shells typically trade on the Bulletin Board or Pink Sheet markets and were at one point operating entities before ceasing normal business activities. Shells on the Bulletin Board are more likely to regularly file with the Securities and Exchange Commission than Pink Sheet Shells. Shell companies are often involved in Reverse Merger Activities with private companies that desire to go public.
Reverse mergers occur when a shell company is purchased by a private firm seeking to become a public company. Consummating this type of transaction involves an exchange of information and shares
WHAT DOES 15-12G MEAN?
"When a firm “goes dark” it deregisters with the Securities and Exchange Commission (SEC) and delists its shares. Deregistered firms are no longer required to make SEC filings such as annual reports, proxies, 10-Ks, 10-Qs and other important documents. And they’re no longer required to have annual meetings or elect outside directors.
To deregister, a firm files Form 15-12G (Securities Registration Termination) with the SEC stating its intent to deregister, usually by a certain date. Once that date arrives, the stock exchange or NASDAQ prohibits future trading in the shares. The firm’s shares are then relegated to the pink sheets, where liquidity is usually much lower. Although the actual process takes some time, the firm’s share price typically will decline immediately after the “going dark” announcement, since many institutions are prohibited from owning shares of firms that don’t file with the SEC or trade on the exchanges or NASDAQ.
Shareholder Action Plan
The lessons here are several:
If a company you own announces plans to deregister, don’t panic. If the fundamentals are intact, the shares are probably worth owning. Even in the less liquid pink sheets, shares of firms with improving fundamentals will appreciate. However, you should call the firm immediately to assess their plans for ongoing communication with outside shareholders. Ask the same questions we did of Southern Energy Homes—which gave the right answers. If you receive answers that indicate communication will be lessened, there may be some governance issues relating to the treatment of outside shareholders. For example, we would find it difficult to own shares of a company that provided only an annual report and had no annual meetings or election of directors.
Make sure the fundamentals are intact. Use the deregistration announcement as an opportunity to perform a thorough review of company prospects. Often a firm will deregister to help hide a deteriorating financial condition, bad accounting or other ailments
Fortune favors the bold. To be a successful investor you must have the courage of your convictions. That means if you’ve done your homework, don’t be afraid to step up to the plate, especially in the face of consensus opinion that’s going the other way. "
Courtesy of John Deysher (Complete Article Link http://www.aaii.com/commentary/articles/200601_stockstrategies.cfm )
What is a Reverse Merger with a Public Shell?
A Reverse Merger is a transaction where by the private company shareholders may gain control of a public company by merging it in with their private company. The private company shareholders receive a substantial majority of the shares of the public company (normally 85% to 90% or more) and the control of the board of directors. The transaction can be accomplished in as little as two weeks, resulting in the private company becoming a public company. The transaction does not go through a review process with state and federal regulators because the public company has already completed the process. The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing the public shell company issues a substantial majority of its shares and the board control to the shareholders of the private company. The private company shareholders pay for the shell and contribute their private company shares to the shell company and the private company is now public.
Upon completion of the reverse merger, the name of the shell company is usually changed to the name of the private company. If the shell company has a trading symbol it is changed to reflect the name change. An information statement, called an 8-K, must be filed within 4 days of the closing. The 8-K describes the newly combined company, stock issued, information of new officers and directors, a full description of the business, and financial statements audited to US GAAP standards. The 8-K must disclose the same type of information that it would be required to provide in registering a class of securities under the Securities Exchange Act of 1934.
(See Sec Final Rule 33-8587, pdf file)
If the shell company is listed on the Bulletin board, the registered or “free trade” shares can continue to trade. The company can do a private placement immediately. To trade new shares offered by the public the newly combined public company must first register the shares with the SEC. This process takes three to four months and normally requires filing a Registration statement with the SEC under Reg. SB-2 or SB-1.
If the shell company does not have a symbol, an application for a symbol is usually made to the NASDAQ Bulletin Board. The application for a symbol requires filing a Form 211 by a market maker that is a member of the NASD. The Bulletin Board has no financial requirements. A listing will be granted if the affairs of the company are in order and the company answers the questions posed by NASDAQ.
Advantages of Going Public Through a
Reverse Merger or a Public Shell Purchase
- Increased Valuation: Typically publicly traded companies enjoy substantially higher valuations than private companies.
- Capital Formation: Raising capital is usually easier because of the added liquidity for the investors, and it often takes less time and expense to complete an offering.
- Acquisitions: Making acquisitions with public stock is often easier and less expensive.
- Incentives: Stock options or stock incentives can be useful in attracting management and retaining valuable employees.
- Financial Planning: Public company stock is often easier to use in estate planning for the principals. Public stock can provide a long term exit strategy for the founders.
- Reduced Costs: The costs are significantly less than the costs required for an initial public offering.
- Reduced Time: The time frame requisite to securing public listing is considerably less than that for an IPO.
- Reduced Risk: Additional risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition even after most of the up front costs have been expended.
- Reduced Management Time: Traditional IPOs generally require greater attention from senior management.
- Reduced Business Requirements: While an IPO requires a relatively long and stable earnings history, the lack of an earnings history does not normally keep a privately held company from completing a reverse merger.
- Reduced Dilution: There is less dilution of ownership control, compared to a traditional IPO.
- Reduced Underwriter Requirements: No underwriter is needed: (a significant factor to consider given the difficulty companies face in attracting an investment banking firm to commit to an offering.)
Disadvantages of being Public
either via a Reverse Merger or an IPO
- Less Confidentiality – complete financial disclosure is required to become publicly held.
- More Public Reporting – Reporting expense is greater because of the need for full disclosure.
- Ownership Dilution – Owners give up some equity percent.
- Greater Time Involvement – Management must devote additional time to public company operations.
- Greater Liability – More company visibility brings a higher level of liability exposure.
- Increased Expense – Higher costs of regulatory compliance for audit, legal and investor relations.
A Great Example of a Low Floater 15-12G Run
FCNK (now RGNO) initial o/s 5M
5/26/06 -Nevada SOS reinstatement
10/3/06 -Filed 15-12g under Mark Smith
First 2 weeks of October 2006 -PPS peaked at $3.70 from 52 week low of .008.