The SEC recently stated in a release concerning “footnote 172 shells” that a start-up company does not necessarily fit the definition of a “shell company”. When a publicly traded OTCBB company files with the SEC as a “shell company” or subsequently checks the box as a shell company on its 10Q or 10K filings then the company is still subject to the one-year hold versus the new six-month period for companies who do not check the box. Back in 2005 the SEC defined a shell company as having no or nominal assets (other than cash) and no or nominal operations. Most SEC attorneys took it upon themselves to interpret the rules and thus played it safe by setting the bar at a million dollars in total assets plus some type of ongoing business concern to pass the litmus test of not being considered a shell company.

The footnote 172 release creates a very interesting situation. A company can now translate this to mean that, regardless of how small they are or how void they are of assets; they do not have to mark the “shell company” box when it comes time to file with the SEC. It gives a company means to ignore the reality of their current situation by letting them ascertain whether they are a legitimate startup or a shell company. There is much motivation for a company not to consider themselves a shell company. Being deemed a shell company would in effect kill the new six month hold period for rule 144. A shell designation would result in a one year hold versus six months and would also make them subject to Worm/Wulff.

This release now brings us full circle back to certain individuals in the industry (“the hardliners”) who have grave concerns about the formation of “footnote 32″ shells (see my previous Blogs concerning this issue) which are, for all intent purposes, manufactured shells. It is easy to surmise that in the future many footnote 32 shells will be rechristened as footnote 172 shells. The hardliners will start screaming that these are not real businesses, only bogus businesses created with the intent of being closed or vended out upon a merger. They will say these charlatans or promoters do not disclose their real intent when they file to go public; which is to flip the shell to a Buyer for a substantial profit. They maintain that the combination of the new six-month Rule 144 hold period and footnote 172 will only encourage the promoters to establish more manufactured OTCBB shells.

The reality of the situation is that the SEC determines which private companies pass muster to become public companies. If the SEC, in all of its wisdom, approves the effectivity of a company’s registration statement and FINRA approves the company for trading then who are we to contradict their approval process. It is not up to the SEC to determine the “intentions” of the company’s Officers and Directors who are filing a registration statement. It is the regulators job to determine if the company has met its disclosure requirements. So, if it passes their scrutiny, which is no small task, it’s good enough for me.

From the viewpoint of performing a reverse merger these types of shells require a lot less due diligence because of the newness of the public company. The shorter the history of the public company the easier the due diligence and the speedier the process of the reverse merger.

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