ISSUES IN 2016 WITH MANUFACTURED SHELLS

If a private company seeks to acquire a public company for the purpose of going public. through a public merger, they will encounter a variety of potential suitors. One of the factors to consider is whether the public company being merged into is a “shell company or a “non-shell” also known as a “non-shell shell.”

This is important because if the public company is a “shell company” the private company selling shares to private investors will not be able use Rule 144 for its investors until one year has passed from the merger. A “shell company” is a company with both (a) no or nominal non-cash assets and (b) no or nominal operations. But, is there any way of knowing for sure from a review of the financial statements whether a company is or is not a ”shell company?” This can be a difficult determination, as the SEC has declined to provide guidelines.

For example, over the past several years the SEC has initiated enforcement actions against public company factories. Herewith the situation: a promoter finds a quantity of persons, 5 to 10 for example, who each incorporates a new company with a purported business plan. Very often, this new company would be in an industry which requires very little capital in order to present the appearance of a real business. For example a company could acquire a nonproducing oil well or gold mine for very little money. Or, it could plan to start some marketing business over the Internet. Then each of these companies files an S-1 with the SEC, obtains clearance of the S-1, and sells a  number of shares to the public. These companies and wait only a few months and then without engaging in any real economic activity, commence to be marketed as public companies at highly inflated prices.

A private company, therefore, needs to have experienced counsel review these issues and understand the likelihood of that company being regarded as a manufactured, and not genuine, publicly trading company.