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09 Dec Going Public with a Public Shell

Pretty generic title for this particular article, but bear with me.

Going public with a shell corporation is either looked upon as the scum of the financial earth (on the part of traditional ibanks) or the catch-all solution to raising capital and access the public markets (from the industry’s internal reverse merger promoters). The truth is that the success of taking a company public through a reverse merger with a public shell depends on each deal and opportunity. In some cases, a reverse merger with a public shell is the obvious route. In many cases, doing so could not be further from the truth. I would place reverse mergers in a similar vein as venture capital: they both have a good potential for raising money, but both come with a loaded bag of potential tricks and excess baggage.

Existing public shells have inherent risks that are often wholly hidden unless a firm is willing to pay the price for excessive and aggressive due diligence on the public shell. Even still, once the DD is complete, your shell may require excessive cleansing by the likes of a reputable and knowledgeable securities attorney. If you choose to manufacture a 419 or SPAC shell from scratch, the cost may be less, but that process also has its own downsides which include smaller or non-existent shareholder base and time to market (up to six months for approval to trade).

Going public through direct filing via a direct S-1 can also be a good route for the right candidate. The issues there include a higher cost than the SPAC  or 419 route and your ability to reuse, recycle or resell the shell post merger becomes much more difficult given the nature of the offering and structure of the deal. I personally prefer the 419 route over some others, due mostly to this reason.

It’s also important to understand the nature of the type of shell you may be purchasing. Here’s a personal story. We engaging with a client recently who was sold a Form 10 shell (what was previously referred to as a blank check company). The SEC greatly frowns on these and I’ve never heard of one that actually got stock out there trading in recent years. The cost to create one is only a couple thousand bucks, if that, by simply filing some forms with the SEC. The downside to this particular client is that she was sold the shell for some $70,000. The shell was transferred and the seller subsequently and quickly disappeared. Criminals like that deserve to be in prison. What a crazy way to run a business. Many of our clients are repeat customers from previous opportunities. But I guess if your integrity and the future longevity of your business in this market is worth (and you can get away with it without going to prison) $70,000, then by all means, sell a bill of goods.

When it comes to navigating the waters of this industry, things can get awfully dicey. If you’re prepared and understand the various areas where you could easily trip and fall, then it can be one of the best ways to build a fortune by accessing the public markets.

 

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.