The Shell Trap By William Cate[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
Publicly traded shells overcome two of
three primary obstacles to becoming a U.S. public company. The private company avoids U.S. Securities Exchange Commission (SEC) initial registration review process. By buying a shell, private company reduces time it takes to go public from over one year to several weeks. The odds of a registration effort getting a SEC "Effective Letter" are better than even. Because shell is publicly trading, odds that shell will continue to trade are almost certain. Shells win on time and certainty issues.
THE PROBLEMS
However, buying a trading shell means dealing with a different set of problems. The Industry Axiom that there is no such thing as a clean shell is true.
1. Shells aren't clean because shell sellers usually hide shares or access to shares that will be sold after buyer takes possession of public company. The shell buyer tries to strengthen public company's share price. The past insiders sell undisclosed shares into this effort. 2. If shell has an operating history, there is always risk of litigation by SEC or by third parties. 3. Actions taken to clean up shell, such as reverse splits of stock are certain to antagonize existing public shareholders and their brokers, who are often company's market makers.
While professionals can help a shell buyer reduce these and related risks, they can't be eliminated.
REVERSE MERGERS
In an effort to overcome third primary obstacle to doing a SEC registration, most shells are sold as reverse mergers. The shell insiders and public retain their shares. The publicly traded Shell Company issues stock for private company that gives shell buyer over fifty percent control of trading shell. The shell insiders expect to make their money by selling their shares.
Without a doubt, a reverse merger is most costly way of going public in United States. It ensures that no knowledgeable investor will do a private placement financing of resulting public company. He knows that shell buyers will dump their stock into any rising price, thus depressing share price. He also knows that added investor relations’ costs of supporting all those extra shares will kill off company quickly. And failure to spend those funds will do killing just as effectively.
FALSE PERCEIVED SAVINGS.
In April 2005, you can buy a public shell with 90% control that trades on Over-the-Counter Bulletin Board (OTCBB) for about US$1.7 million. The costs of doing a reverse merger are about $200,000. The buyer appears to save US$1,500,000. However, insiders have their shares and will sell them. The buyer must pay investor relations costs to find investors for these insider shares.
