Tip of the Week: Value of Nasdaq or NYSE Amex Shell?

Occassionally a client comes to my office excited that they have found a shell listed on Nasdaq or the NYSE Amex. It saves a step they say, because they can complete a reverse merger and be immediately listed on the major exchange. In fact, the benefit is not as substantial as one thinks, and it comes at a cost.

The major exchanges require changes in control, including reverse mergers, to be approved by the shell’s shareholders. In most reverse mergers with non-trading or OTCBB shells, shareholder approval is not necessary. Why is this important? Because the shareholder meeting to approve cannot take place until all shareholders receive a detailed proxy statement with language that is approved by the SEC. A “merger proxy” can be quite a project, and the SEC requires detailed disclosure including a description of all discussions that took place between the parties, what price they started at, why they came to that value, why they ended up somewhere else, etc. Full financial statements and much information about the company merging in has to be included.

In addition, the exchanges do not simply continue the prior exchange listing when a change of control occurs. They require a brand new initial listing application, pursuant to which the merged company must show that it meets the  initial listing standards, which are more strict than the so-called maintenance standards to be kept after listing. For example, the NYSE Amex initial listing requires a $2 or $3 share price, but the maintenance standards do not require a minimum share price. Thus, one wonders why this is better than merging with a non-trading or OTCBB “legacy” shell and then immediately seeking to uplist with an initial listing application, the same thing required when you merge with a shell on the higher exchange.

The two benefits the higher exchange shell provide are shareholders and momentum. Most OTCBB and non-trading shells do not have sufficient shareholders to meet the initial listing requirements of the major exchanges, whereas the higher exchange shells by definition have sufficient shareholders. However, one could merge with a Form 10 non-trading shell and conduct a small public offering to bring in the shareholders, much like WestPark Capital’s WRASP “two-step” approach to a higher exchange listing.

The momentum is potentially a valuable asset. By already having the higher exchange listing, the shell has momentum that presumably makes it a little easier to get that new initial listing application through following a reverse merger. But think carefully before going ahead with one of these shells. I have actually advised one such shell to delist from Nasdaq, move down to the bulletin board with all their shareholders, complete a reverse merger without the delay, hassle and expense of obtaining shareholder approval, then a few months later apply to uplist again. If a company is eligible for the larger exchange it can move later, and this way the reverse merger is completed much more speedily and at lower cost. However, I have also completed mergers with Nasdaq shells, and it can be done. Good luck!

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