Tip of the Week: Are Non-Reporting Shells Better? Sometimes…
By David Feldman at 6 January, 2010, 7:34 am
I am often asked why most players in the RM world prefer shells that are fully reporting with the SEC. They point to the fact that non-reporting shells do not have to file Schedule 14f-1 when a reverse merger change of control is contemplated, they do not have to file the “super” Form 8-K which reporting shells have to file within 4 business days after the reverse merger, and, at least initially, insiders do not have to report their holdings on Form 3 or Schedule 13D. But they have a ticker symbol and that seems to be a benefit according to the marketplace. And, they say, they can file a Form 10 at any time to become fully reporting. And the non-reporting shells are less expensive to acquire.
All this is true, and we have worked on deals where non-reporting shells are involved and they have been successful. The other side of the coin, however, is as follows. First, involvement with a shell that has not been reporting with the SEC makes the due diligence process more difficult. With reporting shells, the vast majority of our due diligence review is contained in the company’s public filings. These are supposed to contain every material event and issue the company has faced, and includes copies of important contracts and transactions as exhibits. Second, if a contemporaneous or near-term financing is planned, many PIPE and private placement investors insist on investing only in a shell that is fully reporting. Third, if a shell is not reporting it can only trade on the pink sheets. Some prefer a shell trading at least on the OTC Bulletin Board. Last, a number of players believe that trading should only occur with full disclosure of events concerning the company. If the full super 8-K is not filed, they wonder how people can trade knowledgably.
All that said, it is fully lawful to combine with a non-reporting shell, and many are actively doing so. Just make sure you have thought through the pros and cons above as it regards your particular situation.
This would make sense to me for small companies like ours doing “roll-ups” of other small companies in the same field or related fields as an “exit” over time to owners wanting out. I realize you might not get the “big fish” deal you want, but what would be wrong it you could get a clean PK non-reporting, file everything (all the k’s and Q’s) keep the outstanding shares real tight and grow it up slowly. When I get to 50 million, then I will get baptisted. With online trading getting easlier and regulation always getting harder- this might be a good start for the Rupert Murdock wannabee’s of the world. Besides, Ted Turner bought a TV station on the pink sheets turned into CNN.
-dr
NC
Mendi – I sent you an email to respond. I look forward to hearing from you.
David