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[QUOTE]Originally posted by CAPTNEMOS: [QB] for the less experienced heres what this means. How does it work? A private operating company merges into a non-operating or shell public company. In the merger, the operating company shareholders are issued shares of the shell in exchange for the operating company shares. Post-merger, the former operating company shareholders own 80-90% of the shell (which now contains the assets and liabilities of the operating company) with the remaining 10-20% owned by the existing shell company shareholders (i.e., the shell’s promoter and its affiliates). The shell company’s name is then changed to the name of the operating company, and the company’s shares are listed for trading on the Pink Sheets or, if it has at least 200 shareholders, the OTC Bulletin Board. Where do these public shells come from? There are many promoters of public shells out there. Do a Google search of “public shell” and you’ll see what I’m talking about. These promoters typically incubate their own shells—they incorporate a company, voluntarily register its shares under the 1934 Act, and then timely file with the SEC the required quarterly and annual reports. Because the shell has no operations, its fairly simple and inexpensive to make these filings. In exchange for letting an operating company merge into a shell, the promoter charges the operating company a fee and retains the 10-20% interest in the shell post-merger. They pitch the shell as quicker, easier and cheaper way to go public than through a conventional IPO. I guess the pitch is technically correct but certainly misleading. For a conventional IPO, a company retains an underwriter who facilitates the sale of millions of dollars of newly issued shares to the public. Thereafter, the underwriter helps develop an active secondary market in the company’s stock by making a market in the stock, having its analysts cover it, etc. The underwriter may charge as much as 10% of the gross proceeds of the offering as compensation for its services, but at the end of the day the company has millions of dollars of new capital to grow its business. With a shell merger, the company does avoid the underwriter’s fee but at the expense of giving up an ownership interest to the promoter. The company is now public in the sense that its shares are registered with the SEC and quoted on the Pink Sheets or OTC Bulletin Board, but it has not received the two primary benefits of going public: additional equity capital and share liquidity. Merging with a shell does not raise any capital. As for liquidity, no underwriter is helping to develop active trading in the company’s stock, so while the shares are technically publicly traded, the market is illiquid. Nonetheless, the company now faces the many disadvantages of being public including increased expenses, increased liability exposure, and loss of confidentiality. The article notes that a shell merger is often coupled with a PIPE (private investment in public entity) transaction, implying that having a pseudo-public market for a stock may improve the chances of receiving private equity capital. This may be true, but it also shuts the company out of future potential VC financings because many (most?) VCs are not interested in investing in public companies. With that said, many companies may have no other financing alternative—no VC is willing to invest, no underwriter is willing to take them public, etc. But I wouldn’t even label a public shell merger as a financing alternative. While not a great alternative, I [/QB][/QUOTE]
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