An irreverent Wall Street Blog
SEC Operation Shell Expel Drains Reverse Merger Cesspool
March 2, 2015
Few queries get my blood more agitated than those in which a client asks my thoughts about the potential acquisition of a so-called Shell Company as part of a reverse merger. The theory is that it's quicker and cheaper to get public by reverse engineering the process through the acquisition of what I often call the "walking wounded": an inactive, publicly traded company gathering dust on some far-flung shelf. This approach is less a bona fide bit of corporate structuring than a cynical wink that greets you at a darkened backdoor in some tawdry alley.
The common theme among these shells are they are trafficked on the OTC market and largely exist in name only. Upon inspection, these companies have no discernible assets, revenue, or operations.
Ahhh, but the do come with one hell of a pitch:
There's a deal brewin'. Keep this between us, it's hush-hus, but [INSERT NAME of high-flying tech firm] is getting ready to acquire the company because of its cutting-edge [CHOOSE ONE: intellectual property, software, or technology].
Welcome to the land of bull shit and reverse merger.
Okay, sure, you can have a legit reverse merger in which a private company is acquired by a public shell and, as a result, the shareholders of the private entity wind up in control of the public entity and, voila, the private shares are transformed into publicly traded ones. It's fast. It's quick. It's also the stuff of Three Card Monte and street-corner shell games. I mean, seriously, think the whole transaction through? Does it send credible? Admittedly, there are some reverse mergers that are honest and legal and truly about the economies of time and money. They are, however, few and far between.
My normal response to folks asking about buying shells is to run, don't walk, as far away from that crap as you can. At best, getting involved with such garbage is little more than snorkeling in a cesspool frequented by pumpers and dumpers and all sorts of lowlife stock promoters and con artists. I trust my thoughts on this topic are clear?
In 2012, the Securities and Exchange Commission ("SEC") rolled out Operation Shell-Expel as part of a frontal attack on the unseemly underbelly of listed but dormant stocks. The SEC hopes that this effort will prevent pennystock and microcap manipulators from foisting shells on an unsuspecting public as part of a pump-and-dump campaign that victimizes many investors. The SEC asserts that during the nearly three years of Operation Shell-Expel, it has suspended trading in over 800 microcap stocks, or about 8% of the OTC market. Although a suspended stock can obtain relisting via updated financials and proof that it's a bona fide operating entity, in truth, the shadowy figures behind such nonsense tend to close shop once the SEC sends its calling card.
On March 2, 2015, the SEC announced it has suspended trading in 128 inactive penny stock companies to ensure they don't become a source for pump-and-dump schemes. READ: "SEC Suspends Trading in 128 Dormant Shell Companies to Put Them Out of Reach of Microcap Fraudsters" (Press Release, 2015-44, March 2, 2015). As noted, in part, in the March 2, 2015, Order of Suspension:
It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of each of the issuers detailed below because questions have arisen as to their operating status, if any. Each of the issuers below is quoted on OTC Link operated by OTC Markets Group, Inc. OTC Markets Group, Inc., however, has been unable to contact each of these issuers for more than one year. In addition, the staff of the Securities and Exchange Commission has independently endeavored to determine whether any of the issuers below are operating. Each of the issuers below either confirmed that they were no longer operating or were now private companies, failed to respond to the Commission's inquiry about their operating status, did not have an operational address, or failed to provide their registered agent with an operational address. The staff of the Securities and Exchange Commission also determined that none of the issuers below has filed any information with OTC Markets Group, Inc. or the Securities and Exchange Commission for the past year
Compliments to the SEC for a job well done!