Shells

Due Diligence for Public Shell Buyers

Microcap securities lawyers are often contacted by private entrepreneurs looking for a way to “go public” via reverse merger.  This process involves finding a suitable, and clean public shell, and thorough due diligence is the foremost concern.

Reverse Mergers vs S-1?

There are many advantages to going pubic via an S-1 Registration Statement when a clean public vehicle for a reverse merger cannot be found in the entrepreneur’s time frame.  But if audits are a concern, and a clean shell can be located, vetted and purchased, a reverse merger can sometimes provide an attractive way to go public.

S-1′s Require Audited Financials

Going public via an S-1 Registration Statement requires the private company to have PCAOB audited financials, and for some entrepreneurs this is not an option either because of time or expense.

Time to Go Public Vs. an S-1

The first step of an S-1 takes a maximum of 30 days from filing before receiving SEC comments (questions) that need to be responded to by the private company’s securities lawyer. Initial S-1 comments typically arrive in two weeks.

Depending on how many rounds of comments there are, the process of going public via S-1 can take a few to several months. Most of this depends on the level of detail provided about the business in the S-1 and then how quickly management can respond to the SEC’s comments with enough detailed information.

Following that, the company needs to go through the process of obtaining a market maker to sponsor the 15c2-11, obtain a trading symbol, achieving DTC Eligibility, etc.

Sometimes an entrepreneur wants or needs to go public faster and with more certainty than an S-1 might allow if starting from scratch.  When this time frame is a great concern, a thoroughly researched and clean Pink Sheet public shell can offer the entrepreneur an opportunity to be public in less than 30 days.

Although many who prefer a direct IPO or S-1 approach to going public tend to view reverse mergers in a bad light, many reverse mergers are executed professionally by teams of securities lawyers, auditors and consultants who specialize in this process.

These professionally advised reverse mergers into public shells involve ambitious entrepreneurs with solid operating companies or technologies that need a clean public shell which has passed due diligence before moving forward.

Going Public Via Reverse Merger With a Current Pink Sheet

When private companies have an operating business but do not have audited financials, often the fastest way to go public is through a reverse merger with a Pink Sheet public vehicle or “shell.”  Entrepreneurs with audited financials are often seeking an OTC Bulletin Board (OTCBB) or OTC Markets OTCQB public vehicle.  Either way, the diligence process begins with the same steps.

Researching Shells By Ticker Symbol

In many cases, the easiest way to research the history of a public shell is by ticker symbol or trading symbol.  The first step is to see what OTCMarkets and SEC filings are posted, and what is past due.

While it is true that current and former OTCBB or OTCQB shells may have more public information available, some Pink Sheet shells have solid filing histories with OTC Markets, and they may be less “out of date” than a former OTCQB which is past due in its filings.

Due Diligence Calls Quantify Cost to Repair Shells

The next steps can be telephone calls to the Issuer’s Transfer Agent, the Secretary of State where the Issuer was formed, and OTC Markets to see if there are outstanding fees or taxes owed that will be added hard costs to the group purchasing the shell.

Caveat Emptor

Is the public vehicle DTC eligible?  Is there a DTC chill on the public shell’s stock?  Is there an SEC investigation into a past promotion or affiliate of the public shell?  These are all valid questions that need to be answered and addressed by a securities lawyer with expertise in public shell due diligence.

Once it is determined that there are no overt red flags which might put the Issuer into the Caveat Emptor (Skull and Crossbones) category, further research into the shell’s organizational structure, such as its history of share issuances and reverse stock splits is warranted.

Convertible Debt in Public Shells

Next, the chief consideration is the documentation of the Issuer’s debt, especially that which can be converted into the common stock in the shell.

Sometimes the debt is listed in the past SEC or OTC Markets filings of the shell, and other times, due to the lack of reporting that caused the shell to become a Pink Stop Sign, a securities lawyer needs to request documentation from the shell’s management or controlling shareholder to find convertible debt.

Restructuring Public Shells

As an OTC securities lawyer, Matt Stout often works with management and controlling shareholders of public vehicles that need restructuring.

Often these companies will be listed as Pink No Information and designated with a Stop Sign on OTC Markets because their quarterly and annual filings are in some cases several years past due.

Clearing Caveat Emptor Issues When History Can Be Documented

In some cases these Issuers will be shown as Caveat Emptor on OTC Markets because the previous management did not respond to SEC inquiries even when management could have fully addressed SEC concerns and had the skull and crossbones lifted.

The process of restructuring involves providing transparency to the SEC, FINRA and DTC by bringing past due filings current, and by addressing any open issues such as DTC chills, and SEC inquiries.

If management of the public shell has the proper documentation, removing a skull and crossbones is possible to achieve in a short time with the help of an OTC securities lawyer like Matheau J. W. Stout who can present the information properly.

When there is no documentation found that can clearly disassociate the Issuer with Caveat Emptor issues, it is often wise for public shell purchasers to rule out that public shell and begin the due diligence process on another ticker symbol.  Some shells are not worth purchasing at any cost and only due diligence will reveal this fact.

Entrepreneurs Purchasing Public Shells

Entrepreneurs who want to go public via reverse merger with an OTCQB or Pink Sheet pubic vehicle or shell can contact Matt Stout, securities lawyer, to discuss the process of performing due diligence on a public shell, and the ways of purchasing a shell.

Groups Selling Public Shells

Controlling shareholders of public shells who are seeking private operating companies and entrepreneur candidates for reverse merger or “vend in” into their shell can contact securities attorney Matt Stout regarding positive steps to take beforehand to clean up the shell’s filings, and to document convertible debt, and the mechanics of restructuring a shell through a reverse split.