Types of Shells Can Vary Greatly
Trading shells come from companies that previously went public but have experienced financial hardship or even bankruptcy. They may or may not still be active companies and they may or may not be current in their SEC document filings. It is the responsibility of corporate counsel to "clean up" the shell; bringing SEC filings current and addressing the numerous regulatory requirements inherent in the process of a Reverse Merger. Counsel will also begin to open the lines of communication with the shareholder base in order to bring them current on the details of the Reverse Merger, educating and informing them of the intentions of the new company and acquainting them with the corporate officers.
Keep in mind that the former company attached to the shell may have been completely different than the one that has acquired it. Shareholders may have invested in a software company five years ago and now own shares of an automotive company. The previous business of the shell has relatively little to do with its current use.
Corporate officers who receive stock in the Reverse Merger do not receive immediately free-trading stock to ensure that they have a long-term perspective on the company. These shares fall under the Rule 144 transfer restrictions. The SEC has recently taken a clear position that these types of so called "free trading" shares obtained in a "shell" transaction do not qualify as free trading unless separately registered or held for a holding period of a minimum of one year and usually two years. Acquiring control of a "clean" trading company requires sophisticated, experienced counsel in the performance of due diligence.
Most Reverse Merger transactions are structured so that 90% PLUS of the outstanding stock will be held by the owners of the privately held company. In order to qualify to trade on most exchanges or over the counter, some amount (5% to 20%) of the total outstanding stock needs to be "trading stock" (not owned by insiders or company affiliates) for the public investors.
One should not increase, beyond what is necessary, the number of entities required to explain anything
