Tag Archives: rule 144 shell status

Can a Start Up Go Public via S-1 as a Shell Company?

Filing an IPO via S-1 Registration Statement gives any private US corporation the opportunity to go public on the OTC Bulletin Board or OTC Markets.   Contrary to popular belief, the SEC does not require companies going public to exceed any minimum asset or revenue criteria.  Any US domiciled corporation can go public using Form S-1 even if it is a brand-new start up with very few assets and zero revenue.

The Decision to Declare Shell Company Status in an S-1

If a start up company’s S-1 Registration Statement shows few assets and operations, the SEC staff member reviewing the S-1 may request that the start up either declare itself to be a shell company as defined in Securities Act Rule 405, or provide a legal analysis in support of its belief that it should not be considered a shell.

Under Rule 405, in order to meet the definition of a “shell company” the Issuer must have

  1. No or nominal assets; or
  2. Assets consisting solely of cash or cash equivalents; and
  3. No or nominal operations.

What Happens if an Issuer Declares Shell Status in an S-1?

For those Issuers which truly are “shells” (such as those with no business model other than to find an operating company to merge into or acquire), declaring shell company status will require the Issuer to revise its prospectus, including the cover page and prospectus summary, to disclose that the Issuer is a shell company.

A shell company Issuer will also need to disclose in the Risk Factors section, the consequences of “shell status” including restrictions on the Issuer’s ability to use registration statements on Form S-8, the limitations on the ability of its shareholders to use Rule 144 and potential illiquidity of its securities.

Declaring shell status in an S-1 when the company is actually a shell does not prevent the S-1 from being declared Effective.  However, according to the “Evergreen Rule” it does have lasting implications (forever) for shareholders looking to deposit and clear restricted stock in the future under Rule 144.

Is a Startup Company Considered a Shell Company Under Rule 144?

No, a start-up company was specifically not intended to be classified as a shell company under Rule 144, and if the S-1 is documented properly, a startup will not need to declare itself a “shell company.”

According to Footnote 172 to SEC Release No. 33-8869 (which was the release that accompanied the final amendments to Rule 144), the amendments to Rule 144 were not intended to capture a “start-up” company or a company with limited operating history that was in the early stages of development.

This footnote was intended to address the concerns of several comments to Release No. 3-8869 that defined a shell company, and the primary concern was that the definition of a shell company was too broad as it would capture and include almost every business in its early stages of development, and specifically those in the start-up phase of operations.

Footnote 172 addressed these concerns in providing that a “start-up company” is excluded from the definition of a shell company since “such a company doesn’t not meet the condition of having no or nominal operations”.

Securities Lawyer for Start Up Companies Going Public via S-1 Registration Statement

Startup entrepreneurs seeking an IPO on the OTC Bulletin Board (“OTCBB”) or the OTC Markets OTCQB can contact securities attorney Matt Stout for a free consultation at (410) 429-7076 or mstout@otclawyers.com.


Pink Sheet Stop Signs and Shell Status Under Rule 144

Sometimes shareholders cannot obtain a Rule 144 legal opinion letter from a securities attorney even though they have held shares in an OTC Markets public company for greater than one year. When this happens, the problem is usually a lack of current public information, which is required under Rule 144.

A Stop Sign Could Be a Shell Under Rule 144

How does a securities lawyer determine whether or not the Issuer is a Shell Company as defined under Rule 144 if the Issuer is a Stop Sign and has not published any public information? An OTCMarkets.com Stop Sign is technically a Pink No Information company under the Alternative Reporting Standard, and this implies that there is not enough information made available to warrant even a Yield Sign.

Simply put, regardless of the Issuer’s past filings, it doesn’t meet Rule 144’s current information requirement so Rule 144 cannot be used. Another way to look at this is that a securities attorney also cannot be sure the Issuer is not currently a shell if it is marked a Stop Sign.

Section 4(1) Legal Opinions Do Not Address Shell Status

When faced with an Issuer that fails to keep its filings current, a shareholder’s best friend could be Section 4(1). A Section 4(1) legal opinion is sometimes considered by experienced securities law counsel when the shares in question are greater than two (2) years old. This is a holding period twice as long as that required of a current Pink Sheet under Rule 144. If that holding period can be met, then “shell status” is not an element of a Section 4(1) legal opinion, since it concerns itself with whether or not the shareholder is an underwriter or dealer, rather than with the Issuer’s filings.