Reverse mergers have a chequered past. During the 1970s and 1980s unscrupulous promoters used reverse shell mergers to deceive investors… they would form new public shells, raise money from investors, and then take that money in the form of fees, salaries, perks and other “management fees”. In many cases, investors were bilked out of millions of dollars. Another popular scheme used by promoters was the proverbial “pump and dump” scam.  In this scenario the promoter would run up stock prices by leaking false information into the marketplace (the “pump”).  They would then sell their shares into the marketplace (the “dump”) while unsuspecting investors where buying base upon false information.

SEC Gets Tough 

The SEC first tightened the screws when they passed a new rule in 2000 requiring ALL OTCBB shells to become fully reporting.  The SEC introduced additional rules that went effective in August of 2005 requiring shell companies to file an 8K within four days of a change of ownership (i.e. upon merging with an operating company).  The 8K transactions are often triggered by one of the two following scenarios:

• a “reverse merger,” in which a private business merges into the shell company, with the shell company surviving and the former shareholders of the private business controlling the surviving company; or
• a “back-door registration,” in which the shell company merges into a formerly private company, with the formerly private company surviving and the shareholders of the shell company becoming shareholders of the surviving company.

If you want read a great article that articulates the changes concerning this issue go to: http://www.duanemorris.com/alerts/alert1921.html

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