12 Jan Manufacturing a Public Shell Corporation
Playing the shell game can be dangerous, particularly if you’re a bit ignorant of how to play. Unfortunately the sharks like to prey on the ignorance of others. In the last two weeks we were working with an unfortunate situation where a shell investor was sold a bill of goods: a Form 10/blank check company with no chance of ever getting cleared to trade. The price: $70,000. And unfortunately even if someone isn’t working an angle to flat-out screw you, you can still get hosed if your due diligence is insufficient. When you jump into a previously operating shell, there is often no telling what you can possibly find behind the curtain. Hence, many a deal-maker has resorted to the cheaper, cleaner option of manufacturing one’s own shell corporation through a SPAC (Special Purpose Acquisition Company) or something similar, ready for taking a company public. This less-known, but highly effective alternative to a traditional shell-based reverse merger has been around for years and still represents a fantastic method for a private company seeking a public offering. What follows is a brief discussion of the benefits, some of the risks and of course the costs of using this alternative route.
Uses & Benefits of a Clean Shell
The value of a clean public shell cannot be understated. The horror stories of getting a bad shell deal are as numerous as the new reports of investor fraud (no coincidence there of course). A clean shell circumvents the need for shell clean-up, avoids the possibility of one-sided convertible debt and takes away the potential for shell skeletons that may come back to haunt a deal later. Going through a long list of the benefits of manufacturing a shell is probably wholly unnecessary. It’s likely sufficient to say that they’re much cheaper to create, fairly quick to implement and they’re clean, clean, clean.
Cost of the Shell
Public shells vary widely in features, cost and structure. When you manufacture one from scratch, the cost range is much more tight. Depending on the firm you’re working with it shouldn’t cost more than $30,000 to $50,000 for the entire process. If you wish to raise money using a PIPE, then the time may take a bit longer, but the money raised will be used in the shell to make asset or stock acquisitions and will not be part or parcel to the readying of the vehicle for eventual public debut. The costs associated with shell manufacturing are almost entirely borne out of the need for the assistance of competent securities attorneys that know the market and know the process of creating a publicly-trading investment vehicle. Those we work with typically charge the $30,000 for the manufacturing in two equal chunks of $15,000 spaced a couple of months apart. Additional costs may be incurred if a tailored shell needs some work, but it’s likely not to take the shell much above the initial $30,000 to $40,000 price to manufacture.
Value of the Shell
The shell immediately gains value. Such value accretion occurs as the result of the liquid nature of the stock and the money-raising potential the stock holds. Once the shell has been created and the shares registered with the Securities and Exchange Commission, then value of the shell can jump from its initial cost of $30,000 to well over $100,000 to the right buyer. If the shell is used as a candidate for a larger reverse merger deal, the shell manufacture may already have performed a reverse merger with a smaller income-producing entity used to get the registered shares trading, thus providing at least a minimal amount of public float. If this is the case the shares value can jump as high as $400,000+. The reason for this is because a new reverse merger candidate can take full advantage of the existing stock in public float, perform a quick reverse merger and begin raising capital immediately. Right around and just before the last stock market downturn, when the market was hot, prices for such registered and trading shells were as high as $700,000. The prices for very similar super clean “Cadillac” shells can range as much as $50,000 to $80,000, but as of this writing most of them are typically revolving around the $400,000 range.
Process & People
Completing the manufacture of your own public shell company typically takes between four and six months, with the latter being the most expected time for SEC & NASD comments and revisions and all the requisite paperwork. Another key component that can remain the bottleneck in some deals, depending on your own network, includes getting the minimal number of people into each deal. A public company is considered public in part due to a large shareholder base. The more shareholders you can get in the shell before it’s sent off for review, the better. A typical baseline threshold for approval is something north of 35 to 40. We typically like to get 50+ with our desire being something closer to 100, just to ensure there is a good base to start with when the stock gets officially trading. In this process, “shareholders” typically buy-in to the stock at a low basis with the expectation that an eventual reverse merger candidate will boost the value of their shares above what they’ve already contributed. Gathering these investors is typically less about raising money but more about getting over the number threshold, unless of course your reverse merger is performing a simultaneous PIPE. Getting them all on board can sometimes be like herding cats, but their initial participation is what makes the initial public market, albeit small.
Crafting your own shell for taking a company public is certainly not a new idea. Such vehicles have provided a much safer method than the typical shell game. While we’ve only scratched the surface on the nuances and structure of performing such deals, it is helpful to note that the next time you want to take a company public without going broke, there is a clean and fairly efficient method for doing so.