A Shell is a company that trades on the OTC: BB (Over the Counter Bulletin Board); is current in its SEC (Securities and Exchange Commission) filings and is fully reporting: the company files quarterly financials (10Q) and yearly audits (10K) issued by a PCAOB certified CPA firm. The financials are accompanied by a 10-QSB and 10-KSB as prepared by an SEC attorney.

These companies are referred to as “Shells” because their original business model failed but their stock is still trading on the OTC: BB. The companies have little or no revenues and would be much better off being a private company versus a public company. To effect a reverse merger the CEO and/or Officers and Directors (the “Majority Shareholders”) must own at least 51% of the outstanding shares of common stock in the company.

The Majority Shareholders (the “Sellers”) control the shell. They will sell their stock to the new company (the “Buyer”) who wishes to become a public company. By selling their shares the Sellers transfer their majority interest to the Buyers, who will now control the new public entity.

These types of financial transactions, also referred to as reverse takeovers or back door listings, result in a privately-held company becoming a publicly-held company without going the traditional route of filing a registration statement (prospectus) with the SEC or undertaking an initial public offering (IPO). Rather, it is accomplished by the majority shareholders of the private company selling all of their shares in the private company to the public company in exchange for shares of the public company.

Popularity

Many people have asked me why the prices of Shells have risen so dramatically over the last couple of years. Well, there are a number or reasons that have caused their popularity. First of all, the SEC changed the rules and mandated that OTC: BB companies had to become “fully reporting” requiring full disclosure to the SEC. This requires identical disclosure that NASDAQ, AMEX and NYSE companies provide to the SEC. The only difference is that the OTC: BB companies do not qualify (yet) to be listed on a stock exchange. Also, the recent implementation of Sarbanes Oxley has deterred scam artists from the “pump and dump” schemes that were so prevalent with Pink Sheet and OTC Bulletin Board Shells of past years. There has also been an influx of foreign companies seeking listing in the US. Many of these ompanies, especially those from Asia, have found the SEC to be less than weocoming when they have filed a registration statement. The SEC is suspect of forgeign companies and in many cases has made the registration proess torturous at best. However, if these same companies back into a Shell, they shorten the process and cannot be prevented from becoming publically traded.

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