Circa Pict. & Prod. Co. Intnl Inc. (fka CPPD)

[willbur]

SEC Orders More Disclosure By Shell Companies
Investor Information
July 6 2005
Shell companies are about to step into the light and only time will tell which of these entities can survive the glare. On June 29, 2005, the SEC adopted a series of rules calculated to assure that investors in shell companies will have access to timely material information. The new rules will require shells to make information publicly available when assets or operations are acquired.

Until now, companies have been able to become public and still avoid detailed disclosure by engaging in reverse-mergers, where a private business takes control of an existing public shell. Reverse-mergers have been appealing because they allow these private companies – which often are tiny and under-capitalized – to enter the public marketplace without the time consuming, exhaustive process imposed by an initial public offering. That is about to change.

When a company becomes public through an initial public offering it is required to file a detailed registration statement with the SEC, providing material information about the company’s financial condition, operations, management and controlling shareholders. This process is designed to protect investors by giving them access to facts which may guide their investment decision.

Reverse-mergers have flown under this regulatory radar. Shell companies often file Forms 8-K disclosing such acquisitions – but little else. While the shell may provide limited financial information for the acquired company, details about management, shareholders, promoters and operations are often scarce. The information may be incomplete, and in some instances misleading or inaccurate, but shares of the former shell have continued to trade without prior review by the SEC.

The lack of disclosure and regulatory input leaves such transactions prone to fraud and abuse. The new rules, which are intended to address those problems, relate to the use of Forms S-8, 8-K, and 20-F by public shell companies.

Form S-8 is a registration statement used by public companies to register shares issued pursuant to employee benefit plans. Shares can be registered for such plans without identifying the individuals who will be receiving stock. And, unlike other registration forms, Form S-8 becomes effective as soon as it is filed, without any SEC review. Form 8-K is used by public companies to report certain significant corporate actions, including acquisitions and mergers. Form 20-F is a multi-function form used by foreign private issuers.

The new rules define a shell company, generally, as an issuer with no or nominal operations and either (i) no or nominal assets; or (ii) assets consisting solely of cash or cash alternatives; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. In other words, companies can not avoid shell status solely by holding cash.

Under the new rules shell companies shall

• be prohibited from using Form S-8;

• be permitted to use Form S-8 (i) once they have become operating entities; and (ii) they have filed with the SEC the same detailed information about the operating company that would be required in a full-blown registration statement; and (iii) 60 days have elapsed since such information was filed.

• File a Form 8-K relating to any acquisition or disposition of assets or change in control within four business days of the transaction, including the same information that they would be required to provide if they were filing a registration statement.

Similar rules will govern foreign private issuer shell companies, which now will be required to disclose material information about newly acquired operating businesses.

The new rules, most of which will go into effect 30 days after they are published in the Federal Register, promise to provide investors with a wealth of information that has not been available previously. Promoters, on the other hand, are likely to start looking for loopholes.