Glossary of Terms

This list, adapted from my book, provides definitions of some of the most-commonly used terms on this blog.

backdoor registration. A method by which a company’s shares can become publicly tradable through a merger directly with a public shell, after which the private operating company survives the merger and succeeds to the public status of the shell.

blank check. As defined in SEC Rule 419, a development stage company with no business plan or whose business plan is to merge with or acquire an operating business. Also referred to as a blank check company.

blue sky laws. Securities laws and regulations in each of the fifty states, regulating the offering of securities in that state. According to www.investopedia.com, the term is said to have originated in the early 1900s when a Supreme Court justice declared his desire to protect investors from speculative ventures that had “as much value as a patch of blue sky.”

due diligence. The process of reviewing a company’s operating history, assets, liabilities, risks, uncertainties, and management in anticipation of entering into a transaction with that company.

Footnote 32. Note in the SEC’s June 2005 reverse merger rulemaking which acknowledges a questionable tactic whereby individuals take supposedly operating companies public with the intention of shutting down or spinning off the business upon a reverse merger. This allows the promoter to avoid Rule 419 restrictions. The SEC declares these entities shell companies.

Footnote 32 shell. Shells created when individuals take supposedly operating companies public with the intention of shutting down or spinning off the company upon a reverse merger. This allows the promoter to avoid Rule 419 restrictions. The SEC declared these entities as shell companies in its June 2005 rulemaking.

Form 10 shell. Shell company created by filing Form 10 on behalf of previously private shell. Creates a clean but nontrading shell.

Form 8-K. Current report required to be filed by reporting companies between periodic reports when certain material events occur, including a reverse merger. The timing of filing was made shorter and the scope of items covered was made more comprehensive following implementation of the Sarbanes-Oxley Act of 2002.

initial public offering (IPO). The process of going public through an offering of securities by a corporation to the public and filing and seeking effectiveness of a registration statement under the Securities Act of 1933.

investor relations (IR). The process by which a company seeks to garner positive attention from broker-dealers and others in a position to influence investment in the company’s public stock. Also includes day-to-day dealings with existing shareholders of a company.

IPO window. The period of time in which IPOs are popular with investors and available to private companies seeking to become public through an IPO. The IPO window is described as open during periods of popularity, and otherwise closed.

merger proxy. A complex filing with the SEC in which one party to a merger is a reporting company.

OTC bulletin board. A trading market most commonly used following a reverse merger, as its listing and maintenance requirements are minimal, other than being a reporting company. Most OTCBB stocks are not heavily traded.

Pink Sheets. A centralized quotation service that collects and publishes market maker quotes for Over-the-Counter securities. Unlike the OTCBB, issuers do not have to be fully reporting companies with the SEC for their shares to be quoted on the Pink Sheets.

private company. A company that has not conducted a public offering nor become a reporting company.

public company. A company that either has conducted and completed a public offering or has otherwise become a reporting company. May include either a company that has completed a public offering but is not a reporting company or a company whose shares do not trade.

private investment in public equity (PIPE). A private placement of equity or equity-linked securities effected for a public company, typically with immediate required registration of the equity sold to the investor.

reverse merger. A method by which a private operating company arranges for its stock to be publicly traded following a merger or similar transaction with a publicly held shell company, pursuant to which the equity owners of the private company typically take control of the former shell company.

reverse takeover (RTO). Another term sometimes used for reverse merger.

reverse triangular merger. A reverse merger in which the public shell company creates a wholly owned subsidiary, and which subsidiary merges with and into the private company seeking to merge. As a result, the private company becomes a wholly owned subsidiary of the public shell company. Typically used to avoid shareholder approval at the level of the shell company and to allow the operating business to maintain its corporate existence.

Rule 144. This SEC rule, under the Securities Act of 1933, provides a popular exemption from registration, allowing otherwise restricted securities to be sold in the public market if they have been held for a sufficient period of time, typically at least six months and in some cases one year.

Rule 144A. This SEC rule permits qualified institutional buyers, or QIBs, to trade restricted securities between and among themselves and allows for broader exemptions from registration for those offering securities to QIBs.

Sarbanes-Oxley Act of 2002 (SOX). The largest and broadest change in U.S. securities laws since 1934, SOX shortened reporting times for most companies’ periodic reports and insider reports, mandated establishment and maintenance of internal financial controls, added corporate governance requirements, in particular with respect to oversight of a company’s audit, eliminated all extension of credit to executives, and required top executives to certify as to the material correctness of their financial statements.

self-filing. The process by which a private company may seek a public trading market for its securities without an IPO or a reverse merger, by completing its own filings with the SEC either to resell securities held by shareholders or to voluntarily become a reporting company.

shell company. A company with no or nominal assets (other than cash) and no or nominal operations. Also referred to as a public shell company.

specified purpose acquisition company (SPAC). A blank check that completes an IPO pursuant to an exemption from Rule 419 for companies raising more than $5 million. SPACs generally have an industry focus with a related management team, and adopt several of the Rule 419 restrictions to assist in attracting investors.

underwriter. Broker-dealer that serves to complete an IPO of a company by purchasing shares from the company at a discount and then reselling them to the broker-dealer’s customers.

Worm/Wulff Letters. Series of letters between the SEC and Nasdaq providing that affiliates or promoters of blank check companies can never sell their shares either publicly or privately under Rule 144 or Section 4(1) of the Securities Act without those shares being fully registered first. These restrictions were effectively reversed by SEC rulemaking effective February 15, 2008.

Adapted from Reverse Mergers: Taking a Company Public Without an IPO ©2006 by David N. Feldman. All rights reserved.

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