Shell Prices…Could it Be?
By David Feldman at 11 May, 2009, 6:01 am
Some of the shells selling for very low prices include those with a history - the so-called “legacy” shells that had a real, serious operating business that was either sold, went out of business or was transferred out of the entity for whatever reason. These are different from the “footnote 32/172″ shells that were in fact set up as acquisition entities but pretend to have a real business in mining or some such. The legacy shells usually went public with an IPO, or prior reverse merger, and really operated for a bit.
In my prior column on shell prices dropping, I suggested a big part of the drop was the proliferation of footnote 32/172 shells, and that the lower prices were mostly attaching to them. But it seems that either this trend and/or others have caused all shells, even legitimate legacy shells, to see a major price drop, in many cases below $300,000. So here’s what I am wondering. Is it possible that the market has finally begun to realize that the true difference in value between a Form 10 shell and a true legacy shell in fact is minimal at best? As many of you know, I have always argued that trading in a shell is a benefit that is at best illusory. Not that there are not real benefits to a trading stock in a shell, but they are typically also offset by the uncertainty of the legacy shell’s prior business and what, if any, liabilities from the past will haunt the successor. That concern does not exist in a Form 10 shell.
And since Form 10 shells are very inexpensive to set up, the prices to acquire one have always been low. It may be that the reality of true value has begun to hit the marketplace along with all the other factors mentioned in my prior column. What are the implications of that? Stay tuned.
David-
Is there such a thing as a legacy shell that can be disguised as a Form 10 shell for some reason? Is such a thing possible?
Nicholas, not sure what you might be referring to. A Form 10 shell generally admits that it is a shell, so not sure I would understand why, if it were a true legacy shell with a prior business it would pretend not to be. If you have further questions, don’t hesitate to contact me directly.
David
It is interesting to see the market begin to make this correction in pricing. I work with a lot of Form 10’s, and I am curious to see how much more it will correct.
If you need any help with the Form 10s let me know!
David
If a company files an S-1 as a small operating company, and FINRA ‘recommends’ that the status of the company be changed to shell status, how would this compare with a Form 10 company? Would it have greater or lessor value?
Hi Mike, if an operating company has to check the shell box, they can still trade once FINRA approves, so that makes it different from a Form 10 where the stock cannot trade prior to a merger and subsequent registration of shares. But they are subject to the various other restrictions on being a shell and, later, a former shell, in connection with Rule 144 and other things. Just make sure the “small operating company” did not go public in order to market itself as a shell and then strip out the operating business, because if that intention is not disclosed then you are in violation of securities law.
Thanks David.
I am aware of Rule 144(i) which pertains to shell status companies.
If a “small operating company” which had to change its status to a shell in order to trade, were to effect a reverse merger, how is that a violation of securities law? Wouldn’t the fact that the company is now deemed to be a shell, negate such violations?
Mike, you are correct. If an operating company decides to check the “shell box” and declare itself a shell company, its obligations include filing a so-called “super” Form 8-K when it ceases to be a shell and being subject to Rule 144(i) both during and after being a shell. There is no securities violation in checking the box if indeed the company is a shell under the SEC definition, and then following the rules for what happens when the company ceases to be a shell.
Thanks again David for your expert opinions!
Thanks for stopping by Mike!
Mike, it is not a violation of securities law for a shell to effect a reverse merger. It just has to follow SEC rules, including filing a so-called “super” Form 8-K upon ceasing to be a shell, and is subject to the other restrictions in Rule 144(i) if people seek to sell without having their shares registered with the SEC.
David
I believe the marketplace would deem it to be of greater value because the small operating company, even though checking the shell box, would be permitted to have its stock trade. The Form 10 shells’ stock cannot trade prior to a reverse merger and subsequent registration of shares or availability of Rule 144. While I think that delaying trading until a few months after a reverse merger should not effect the value of the shell, the marketplace disagrees with me.
David
The marketplace probably places a greater value on a trading company because it has completed the 211 process which can take 2 to 3 months or more. And we all know time is money!
I have heard that it can be difficult to get a stock DTC eligible if it is a shell status corporation. Are you aware of any regulations that would inhibit such companies from becoming DTC eligible?
Thanks again.
After a Form 10 shell does a reverse acquisition with an operating company where does the free trading stock come from for trading purposes. It would seem that OTCBB or pink sheet trading would have to be delayed for a year after the super Form 8-K is filed. Must a company have free trading shares in order to start trading on the over the counter market?
Boone, it is common to register some shares with the SEC after a Form 10 merger, this takes a few months. After that, the shares that were registered can trade, assuming FINRA approves granting approval to do so. If no shares are registered then most shares become able to be sold without being registered one year after release of the “super” Form 8-K under Rule 144.
David
Hi Dave: Just found your blog and love it.
We got a small startup registered with an SB-2 some 22 months ago and fought the “shell” battle with FINRA. They forced us to “check” the shell box and to amend our prior filings costing us thousands and 5 months to get approval. Even with the advent of Footnote 172, which was published at the time, the SEC refused to enforce the measure against FINRA, instead referring to those inexperienced FINRA twentysomethings as an “independent” lot that doesn’t like the SEC to tell them what to do. After making repeated attempts, backed by numerous legal arguments, FINRA simply ignored the intent of Footnote 172, saying they didn’t see it the same way as the SEC. The SEC fuels FINRA by failing to define the monetary values of what constitutes a “shell” in their official definition of shells only using the word “nominal” in terms of assets and revenues. Failing to give “absolute values” gives FINRA too much power determining “shell status” and in ultimately making some non-appealable decisions on who should trade or not.
I am also interested in your input from Mike as to whether DTC will approve a trading shell?
Thanks and keep up the good work.
Thanks for the kind words Jim. Just as footnote 172 had the perverse effect of further encouraging the creation of fraudulent trading shells with a business intended to be discarded as soon as a reverse merger is found (but this intention is never disclosed), it also led some trying to stop this questionable practice to go the other way and assume that every start-up is a shell. Tough to balance between legitimate early stage companies that see the benefit of having a trading stock and the too many who choose to deceive by failing to disclose other intentions.
Best,
David
Good stuff David!