ISSUES WITH PUBLIC MERGERS WITH FORM 10 SHELLS
Long ago in ancient history, in the 1980s, there was explosion of blind pool/blank check offerings. A blind pool/blank check offering is an offering where the promoters offer shares to the public in a company which admits that it has no operations or assets, but only seeks to raise money in order to then use that money to attract a reverse merger candidate.
Of course, as with any regulatory scheme, there arose persons who abused that process, there were scandals, and the regulators clamped down by promulgating Securities Act Rule 419 in 1992. Securities Act Rule 419 basically states that a blank check registration statement is permitted, but, all of the offering proceeds have to be escrowed until the public merger is completed, the registration statement is amended, and the purchasers in the offering all approve the reverse merger transaction. The funds must be returned if an acquisition is not completed within a specified time. Blank check rule 419 offerings still take place, but most of them fail because they do not find an acceptable merger partner.
Special-purpose acquisition companies (SPACs) are merely Rule 419 offerings which raise substantially more money and have a few advantages as a result of that. Most of them also fail to find in an acquisition.
In 1992, an enterprising California lawyer invented the Form 10 shell. Instead of filing an S-1 or other registration statement for a blank check offering, a Form 10 shell is created by filing a registration statement on Form 10 with the SEC. Form 10 does not permit the company to sell its shares to the public, but it does make the company an official public company, required to file reports just as any other public company. Some Form 10 shell companies had only one shareholder, but most had several dozen shareholders, who then could resell their shares after the holding period of Rule 144 (one or two years at the time) and thus a public market could be created without need to comply with rule 419.
In the matter of few years, the Form 10 company became very popular. Since it was newly incorporated, and had no operations, private companies wanting to go public do not need to concern themselves with the prior liabilities of the company. Eventually however, again, the regulator stepped in and ended heyday of the Form 10 shell. In a later blog we will discuss the Worm\Wullf letter which came out in 2000 and effected the sea change in the going public. and the public merger process.
However, Form 10 shells continue to be formed and marketed for prices of $10,000-$40,000. The cost to create one of his vehicles is usually under $10,000, and they are of doubtful utility. This is because the Form 10 shell company is unable to become publicly trading. Therefore, the entire process for a private company merging into a Form 10 shell substantially identical to that involved in effecting their own IPO.
