I have been reading quite a bit about the evils of Footnote 32 shells. These OTCBB shells are also referred to as “manufactured shells”. After a thorough review I have come to the conclusion that most of the comments have originated from a group of individuals who are extremely bias. There is little substance to the articles and, in this writers’ view, their comments reveal a “sour grapes” attitude.

Footnote 32 is part of the SEC rule making passed in June 2005. The rule provided a clear definition of a shell company. The SEC defined a shell company as one with no or nominal operations and/or nominal assets (other than cash).

The opponents to Footnote 32 shells believe there are two “legitimate” ways to create shells:

(1) through Rule 419 (the old “blank check” company rules which require SEC approval at the time of creation and the time of the private company acquisition), or

(2) filing a Form 10-SB to create a reporting company whose business plan is to acquire an operating business.

Here is the rub. Shells manufactured under both of these ways cannot obtain trading symbols before the reverse merger. The exception to the rule is SPACs who raise a substantial amount of money and are allowed to trade.

Trading shells command a huge price premium over non trading shells because:

(1) they are trading and have a ticker symbol and

(2) the Buyer saves a substantial amount of time (6-12 months) and expense (over $100,000) by avoiding having to file a registration statement

Certain people in the Revere Shell Merger Association are seeing red and are bound and determined to stamp out these “unscrupulous promoters”. They claim Footnote 32 shells are, for the most part, bogus businesses, or merely business plans, created for the sole purpose selling the shell after it gains trading status. This group believes these bad guy promoters should be shot. Part of the raison d’être of the Reverse Merger Association is to expose the sponsors of the Footnote 32 shells. They feel the problem with Footnote 32 shells is that they severely disadvantage honest sponsors following the letter of the law who’s Rule 419 or Form 10-SB shells do not have a ticker symbol and do not trade.

They believe we should all be blowing the whistle on bogus Footnote 32 shell promoters to the SEC. They also believe that the SEC is stepping in to examine these types of shells. Wishful thinking. Nothing could be farther from the truth.

How in the world could the SEC possibly determine the intention of the registrant? Are they to sit around with turbans on their heads and glaze into a crystal ball? Maybe they could get every registrant to take a lie detector test. The SEC’s job is to review the registration statements for accuracy and disclosure. They are not there to be mind readers.

My viewpoint on this issue is that nobody can ascertain the intention of a company or its CEO when they file a registration statement. Statistically, 80% of the company’s that go public end up failing. So, does it really matter if the shell is sold shortly after it is approved for trading or five years later after the company has failed? I don’t think so. The other thing to consider is that, as a Buyer, would you rather perform due diligence on (i) a company that has a 3 month history and just started trading or (ii) a company that has a 10 year history? Most likely the newer company would be much easier and quicker to perform due diligence on.

Recently I have been contacted by several companies who have inquired about selling their shells. These companies could possibly be considered as Footnote 32 shells. Do you know what happened? When an abundance of these shells hit the marketplace the price of shells deteriorated. The law of supply and demand still exists. If there are too may shells for sale the prices will drop. So, from a Buyers perspective, the more shells to choose from - the cheaper the price. Perhaps there really is no problem with the Footnote 32 shells. Maybe the protagonists are just pissed off someone is cutting into their action.

I, for one, do not intend to become the “shell police”. At the end of the day it is not up to me to pass judgment on which shell is “worthy” of selling. If a company has passed SEC scrutiny and their registration statement has gone effective and they have also received approval for trading by FINRA that’s good enough for me.

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