What’s Wrong With A Form 10 Shell?
Many issuers seeking to raise capital often attempt to go public using a reverse merger with a public shell. Blank Check Companies, which file a Form 10 Registration Statement (“Form 10 Shell”), are being marketed as a method for private companies to obtain public company status.
Often Form 10 Shells are not a timely solution or cost effective method for a private company to obtain public company status. Most Form 10 Shells are not structured properly for a publicly traded company and most do not have ticker symbols. Additionally, the private company purchasing the Form 10 Shell will have the time and expense of:
(i) due diligence and completing the reverse merger transaction into the Form 10 Shell;
(ii) notification to and approval of FINRA pursuant to Rule 6490; and
(iii) additional disclosures including the filing of Form 10 Information in a “Super 8-K” which is triggered by the reverse merger.
Purchasing a Form 10 Shell does not assist a private company in going public. Under most scenarios, it makes going public more expensive, time consuming and difficult. Often a Form 10 Shell is subject to the SEC’s reporting requirements but its securities do not have a ticker symbol. Because the company does not have a ticker, it is not attractive to investors. As such, the purchaser of a Form 10 Shell may incur the expenses of SEC reporting yet may derive no benefit because the securities are not publicly traded. As a result, the cost of Form 10 Shell exceeds the expenses of a direct public offering and listing.
A direct public offering involves the filing of a registration statement typically on Form S-1 with the Securities and Exchange Commission (“SEC”) and once effective, if structured properly, a sponsoring market maker will file a Form 211 on the issuer’s behalf with the Financial Industry Regulatory Authority (“FINRA”).
What is a Form 10 Registration Statement?
A Form 10 is a registration statement under the Securities Exchange Act of 1934 (“Exchange Act”) to register an entire class of securities, while a registration statement under the Securities Act registers a certain number of shares for particular transactions.
A Form S-1 Registration under the Securities Act of 1933, as amended (“Securities Act”) is the most commonly used form for a Securities Act registration statement. All companies qualify to register securities on Form S-1.
Unlike a registration statement on Form S-1, a Form 10 registration statement also does not affect the tradability of securities. After a Form 10 registration statement becomes effective, restricted securities remain restricted and unrestricted securities remain unrestricted.
When is Form 10 Registration Required?
Section 12(g)(1) of the Exchange Act requires any company with total assets exceeding $10,000,000 and a class of equity security…held of record by five hundred or more persons to register under the Exchange Act. The measurement date for these thresholds is the last day of a company’s fiscal year. It then has 120 days from that date to register.
Any issuer may voluntarily file a Form 10 registration statement under Section 12(g) of the Exchange Act regardless of their assets, number of shareholders or revenues.
A Form 10 registration statement requires that the issuer disclose much of the same information required in a Securities Act registration. This information includes, among other things, a detailed description of its business, properties, risk factors, transactions with management, legal proceedings, and executive compensation as well as its audited financial statements.
Upon filing of a Form 10, the SEC may render comments to the disclosures. Regardless of whether such comments have been answered satisfactorily, a Form 10 registration statement automatically becomes effective sixty days after its initial filing. This effectiveness causes the issuer to become subject to the SEC’s periodic reporting requirements.
Once a company has a security registered under the Exchange Act or the Securities Act, it is required to file the SEC annual, quarterly, and current reports. An Issuer with securities registered under the Exchange Act must additionally comply with SEC proxy rules. Its directors, officers, and holders of ten percent or more of its outstanding securities must comply with beneficial ownership reporting requirements and the issuers securities become subject to the short-swing profit rules under Section 16 of the Exchange Act.
Getting a Ticker and Trading
Even though an issuer that files a Form 10 registration statement becomes subject to the reporting requirements of the Exchange Act, that does not make the company public or qualify the company for a ticker assignment from FINRA. An issuer must still satisfy other regulatory requirements and criteria to obtain a ticker symbol and be quoted by the OTC Market’s Pink Sheets, OTCQB, OTCQX or list on a securities exchange such as NASDAQ or the NYSE.
Generally, FINRA requires that the issuer have at least twenty five shareholders who hold either registered shares or, with respect to Pink Sheet listed issuers, shares that have been held by non-affiliated investors for twelve months. The majority of the twenty five holders must have paid cash consideration for their shares. Additionally, these shares in the aggregate should represent at least 10% of the issuer’s outstanding securities and are often referred to as the “Float.” The Float must also be somewhat evenly distributed without significant concentration in one or a few shareholders. Under FINRA rules, only a sponsoring market maker can file a Form 211.
By undertaking a Direct Public Offering, the issuer avoids many of the expenses and risks associated with reverse merger transactions, including incomplete and sloppy records, pending lawsuits and other liabilities such as securities violations. After a reverse merger with a Form 10 Shell, the private company is forever labeled as a shell or reverse merger issuer, which makes it much more difficult to raise capital because Rule 144 is unavailable for its investor’s resale. Issuers who go public through direct public offerings avoid the shell company and reverse merger stigma. Additionally, issuers who go public through Direct Public Offerings have lower costs and the added credibility associated with providing transparency by filing an S-1 registration statement with the SEC.
For more information about reverse merger transactions please visit our blog post here.
For further information, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real South, Suite 202 North, Boca Raton, Florida, (561) 416-8956, or by email at [email protected]. This securities law Q&A is provided as a general informational service to clients and friends of Hamilton & Associates Law Group, P.A. and should not be construed as, and does not constitute legal advice on any specific matter, nor does this create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar results.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Going Public Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855