Stock Learning

A Shell Stock (Shell Company) is a public company that no longer has any business operations. It retains its capital structure and public trading status with the intention to complete a reverse merger with a non-public company with an on-going business. This merger creates a new company that is both publicly trading and generating revenues. There are many reasons why a Shell Stock exists in the first place, but most commonly they either lost the business due to a bankruptcy, or just sold or closed it.
The SEC (Securities and Exchange Commission), in Rule 12b-2, defines a "Shell Company" as "a registrant with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets." Previously, the SEC referred to a Shell Company as a Blank Check Company.
Why would a private company with an on-going business want to reverse merge into a Shell Stock? The goal of the private company is to become a public company. There are many benefits in becoming a public company. The traditional method of becoming a public company, via an IPO (Initial Public Offering) can be very expensive and time consuming. Becoming public via a reverse merger is less expensive and much quicker.

Types of Shell Stocks

Public traded stocks generally fall into one of two categories. Either they report to the SEC or they do not.

Reporting: Required to file periodic Quarterly and audited Annual financials with the SEC. They also report changes in stock ownership and any material changes in the company's structure.

Non-Reporting: Forgo any reporting to the SEC.

When comparing a Reporting Shell Stock to a Non-Reporting Shell Stock, keep in mind that with a Reporting Shell Stock, you can visit the SEC website and review detailed audited financial and stock owner information. With a Non-Reporting Shell Stock, you can only rely on what the company chooses to report.

Shell Stock Strategy

Most investors buy Shell Stocks when there are rumors of a potential reverse merger. But, they become impatient when the reverse merger does not happen and sell . . . usually at a loss.

So what is the best Shell Stock strategy? Probably it is best to buy several Shell Stocks and forget about them. Hopefully you will resist the temptation to sell when things get boring, increasing your chances of participating in a reverse merger - sometimes producing huge returns.

Blank Check Company

A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. These very small companies typically involve speculative investments and often fall within the SEC’s definition of "penny stocks" or are considered "microcap stocks."
Because of the nature of blank check companies, the SEC does not allow them to use some of the exemptions from the registration requirements when selling their securities.

Reverse Merger

A Reverse Merger is an alternative method for a private company to become publicly traded. It is synonymous with an IPO (Initial Public Offering), but less expensive and quicker. Typically, a private company is merged into a public shell stock, with the owners of the private company obtaining control of the new combined public entity.

To better understand a Reverse Merger, the two methods of becoming a publicly traded company should be compared.

IPO (Initial Public Offering) – Traditional Process.
The traditional and most common method for taking a company public is called an Initial Public Offering or IPO for short. In this process, the private company utilizes the services of an Investment Banking firm to sell its stock to the public for the first time. This allows the private company to raise much needed capital to help grow its business. The Investment Banking firm collects a commission for proving this service. After the IPO has been completed, any individual can purchase the stock by placing an order through a stock brokerage firm. There are some drawbacks with completing an IPO via this traditional method. It can be very expensive. The cost for legal and accounting fees, underwriter fees, marketing fees, printing fees, and various other fees can cost several million dollars. This process can also be also very time consuming, taking anywhere from months to years to complete. One other difficulty in completing an IPO involves the Investment Banking firm that is doing the underwriting. They may decide when the private company goes public, how much money they raise, and may even make “suggestions” to the private company owners on how to run their business, thus causing them to loose some control over “their” company.

Reverse Merger – Alternative Process.
The alternative process of becoming a publicly traded company is called a Reverse Merger. In this non-traditional method, the owners of the private company purchase a Shell Stock. Note that one significant difference between an IPO and a Reverse Merger is that when completing a Reverse Merger and becoming publicly traded, the private company has yet to receive any capital to expand their business. Usually, after the Reverse Merger is completed, the company raises the needed capital by selling restricted stock to a pre-arranged list of investors (sometimes referred to as a PIPE – Private Investment in Public Equity). The cost of purchasing a Shell Stock is much less expensive than completing a traditional IPO. Depending on the type of Shell Stock purchased, the cost can range from $50,000 - $1,000,000 for 70% to 95% of the outstanding stock. The time to complete a Reverse Merger may happen in a fraction of the time to complete an IPO, sometimes taking only 2 - 4 months. One other factor that makes a Reverse Merger an attractive means of going public is that the owners of the private company retain the entire decision making in the process.

Benefits of becoming a Public Company

• Public companies are valued higher than private companies.
• Making acquisitions with stock is easier and less expensive.
• Stock and stock options are useful in attracting quality employees.
• Employee stock options have more value.
• More liquidity for founders, minority shareholders, and investors.
• Added prestige and visibility with customers, suppliers, employees and the financial community.

• Verified Shell Stock Looking For an Acquisition: It should be actively looking for a reverse merger. Verification can come from SEC reports, news releases, or verbally from company management.
• Experienced Management: Management must understand the mechanics of a reverse merger and know a good business opportunity. If management is not experienced, it is imperative they are working with an experienced consultant.
• SEC Reporting: it must report regularly to the SEC. This is known as a "reporting company." We want to be able to verify information about the company from public/legal filings, not by word of mouth or rumor. Believe it or not, there are public companies that are non-reporting.
• Clean: It has little or no debt, no pending law suites, and little or no outstanding convertible securities (preferred stock or warrants). We don't want anything that can complicate the reverse merger.
• Small Number of Outstanding Shares: The smaller the number of outstanding shares, the better. A smaller number of outstanding shares lessens the chance of a Reverse Stock Split. A Reverse Stock Split can lessen the chance of price appreciation.
• Low Market Value: This is the buy low sell high rule. A Shell Stock with a low Market Value will have a greater chance of price appreciation than one with a high Market Value. (Market Value = price X shares outstanding). Note: the Profile List by Market Value sorts the Shell Companies from low to high Market Value.
• Cash On Hand: Some Shell Companies have cash remaining from their previous business endeavors. Having cash to fund the new company's business plan will attract high quality candidates.

• Tax Loss Carry Forward: The new company can offset future net income with the Shell Stock's Tax Loss Carry Forward.
• Exchange Listed: It is better for the Shell Stock to be listed on a stock exchange (NYSE, AMSE, NASDAQ, OTCBB). But, there are some quality Shell Companies that are trading on the Pink Sheets.

• Increased Volume/Price: Increased volume and price with no news may be an indicator of a potential reverse merger. Information on a reverse merger sometimes leaks out and insiders/family/friends start buying before the reverse merger is announced.
• Corporate Activity: Cleaning up debts, law suits, and issuing reverse splits can indicate management is getting the shell company ready for a reverse merger.

• Require a public shell company to report on Form 8-K an event that causes it to cease being a shell company and to include in that Form 8-K the same type of detailed financial and other information about the company as is required to register a class of securities under the Securities Exchange Act of 1934 (Exchange Act);
• Prohibit a public shell company from using Form S-8 (the abbreviated registration statement used to register securities issued under employee benefit plans) until 60 days after it ceases to be a shell company; and
• Require every public company to check a box on the cover of all annual and quarterly reports to identify whether or not it is a shell company.