When you are considering how much of a float you want to remain, you have to consider how many shareholders hold a large block of stock. The best way to determine this is to examine a certified copy of the shareholders list from the transfer agent. The shareholders list contains the name of every shareholder and the number of shares they own. You will need to take into account that sometimes a larger shareholder will place shares in associated family member’s names, so be cognizant of shares that have several shareholders with the same last name listed together. Most likely they are controlled by one person. Secondly, there is a list of shareholders whose shares are held in what is referred to as “street name”. Street name shares are those shares that are held in the name of a brokerage firm such as ETrade, TD Ameritrade, etc. Street name shares are not listed under the brokerage firm in which they are held. They are listed as generic shares, which means the true holder of the shares is not identified. The street name shares are listed under CEDE & Company – which means the shares are being held in electronic format.

You may or may not be able to determine if someone has a large block of shares. For example, a shareholder holding shares under CEDE & Company may have one share certificate listed as 500,000 shares or he may have 10 stock certificates listed with 50,000 shares each. The inherent problem is that you can not determine whether there are several different shareholders who own shares or one shareholder with several share certificates that could own, as an aggregate, a large block of shares.

This leads us back to my previous discussion in Chapter VI. It is always better to err on the side of caution and reverse split the stock of the previous shell company shareholders so you do not have to deal with these types of potential problems. It is nice to have a large shareholder base – you just don’t want them to have enough shares to cripple your stock price.

It is always in your best interest to have an experienced consultant represent you when you are seeking to purchase a shell. There is a wide range of issues to anticipate, and as the old saying goes, “an ounce of prevention is worth a pound of cure”. Make sure you are retaining a reputable and knowledgeable person to represent you. Attorneys are great for the due diligence part of the purchase, however it is not their job to negotiate pricing, explore capitalization issues or examine the nuances of the shell you are about to purchase.

For further information regarding shell purchases please contact me at Ralph@ventanacapitalpartners.com

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This is one of the most interesting topics to discuss because there are varied opinions about how many shares should be left in the float. Once again this depends on the capital structure of the shell you are buying. I have clients who will not purchase a shell unless they can get every share delivered. This is commonly referred to as a “Full Monty.”. These are shells that have approximately 20% to 30% free trading shares. The new Buyers of the shell would like to transfer those free trading shares from non affiliates of the previous company to their new non affiliate investors.

If you are purchasing a shell that has 51% to 90% delivery, then how much of a reverse split of those shares should you implement before you issue new restricted shares to your Officers and Directors?

Well it really depends on how many shares are outstanding and how many are going to be delivered to you to begin with. Let’s say, for example, that you have bought a shell that is delivering 51% of the shares. The company has 100,000,000 million shares outstanding and they are delivering 51,000,000 shares (51%) controlling interest to you. Let’s also assume that you want to value your company at $10,000,000 plus you want a capital raise of $2,000,000 and you would like the stock to start trading at $1.00 per share. There is a right way and a wrong way to handle the reverse split and capital structure.

Reverse Split Capital Structure – The Wrong Way

If you reverse your stock 10 for 1 you have 10,000,000 shares @ $1.00 per share. BUT here is your problem. You have 4,900,000 shares owned by the previous shareholders who not only still own 49% of your company but who are also going to hit your $1.00 bid until they crush your stock down to pennies a share. Why, you ask? Simple! They have lost all of their investment in the previous company and are looking to sell your stock to recoup some of their losses. If they crush your stock (which they will), then you will not be able to raise your $2,000,000 at $1.00 per share. You will most likely be raising the $2,000,000 at $.10 a share, thus having to issue an additional 20,000,000 shares. At the end of the day you will have 30,000,000 shares outstanding and you only own 5,100,000 shares or 17% of the company. Not exactly what you envisioned when you first started on this journey.

Reverse Split Capital Structure – The Right Way

If you take the same scenario but reverse split the stock 1000 for one you now have only 100,000 shares of which only 49,000 shares are owned by the previous shareholders. Now you issue 9,900,000 new shares to the Officers and Directors. You have retained 99.5% of the company and you do not have to worry about 49,000 shares hitting you in the marketplace. You can now raise your $2,000,000 @$1.00 per share. You will have to register those shares and those 2,000,000 shares will essentially become your float. Since those investors paid $1.00 per share there is a good chance your stock will start trading at or above $1.00 per share.

I can give several more examples but the reverse split and capitalization of your company is subject to your unique situation.

If you have additional questions please contact me at Ralph@ventanacapitalpartners.com

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Should you purchase shares in the shell before or after the reverse merger takes place? If you are trying to buy before the merger takes place there certain assumptions you must make when considering buying shares in a public company that is in a pre-reverse merger mode. First of all, you are purchasing shares in a company that may or may not complete a reverse merger with another company. Secondly, you do not know what company is going into the shell.

I suggest the best thing to do is to wait until there is an announcement, usually a filing of an 8K, by a company. The filing will usually announce a material change in the Officers and Directors of the company or a sale or exchange of shares. This is your first clue that something is up. The new company will then have to file their financials within 3 business days. Once the new company has filed their financials you can start calculating the value of the new company going into the shell. If you want to play it safe wait until the reverse merger and the reverse split of the stock has taken place before you start buying shares. The most difficult part of this type of transaction is determining if there is going to be a reverse split and, if so, to what degree. The total outstanding shares of the new company are determined by the valuation of the company as measured by management or their investment bankers. The question always remains: Do they want a stock that trades at $.50 or $5.00?

Once you have ascertained the number of outstanding shares and the previous earnings of the company you can calculate the earnings per share. For example if a company has 10 million shares outstanding and it earned $2 million dollars that would translate into $.20 per share earnings. Taking into account a PE multiple of 10X to 20X earnings the stock should trade somewhere $2.00 to $4.00 per share. What we are trying to accomplish is akin to a treasure hunt. If you discover the “treasure” before everyone else does you have a distinct buying advantage and, in most cases, you can purchase shares of the new company that are still trading at the previous company’s pricing. So you are trying to accumulate shares before the word gets out and before the PIPE hits the markeplace.

FYI – You can get access to SEC filings by going to www.epoinvestor.com. ePO gives you “The IPO Report” which has all SEC filings for IPO’s and secondary offerings including OTC bulletin board companies. ePO also allows investors to purchase IPO shares of NASDAQ and Amex qualified companies via an online Google style Dutch auction process. Membership is FREE.

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