Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Wednesday, July 24, 2013

Form 10 Shells l Reverse Mergers

Form 10 Shells l Ask Securities Lawyers 101
Issuers seeking to raise capital often attempt to go public using a reverse merger with a public shell. Blank check companies that file Form 10 Registration Statements (“Form 10 Shells”) are marketed as handy vehicles private companies can use to go public easily.
Form 10 Shells are rarely a good 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. A private company purchasing a Form 10 Shell will have to commit time and money to: (i) due diligence and completion of the reverse merger into the Form 10 Shell; (ii) notification to and approval of FINRA pursuant to Rule 6490; (iii) additional disclosures, including the filing of Form 10 information in a “Super 8-K,” the need for which is triggered by the reverse merger; and (iv) locating a sponsoring market maker to file an SEC Form 211 application to obtain a trading or ticker symbol.

The Problem with Form 10 Shells

Purchasing a Form 10 Shell does not help a private company go public; it makes the process more costly, time consuming and difficult. Often a Form 10 Shell is subject to the SEC’s reporting requirements but its securities are not publicly traded.  As such, the purchaser of the shell may incur the expenses of SEC reporting yet derive no benefit until steps have been taken to qualify it for trading including the filing of a registration statement under the Securities Act. As a result, the costs of reverse mergers into Form 10 Shells almost always exceed the time and expenses of filing a registration statement under the Securities Act.
SEC Registration Statements
All issuers qualify to file a Form S-1 registration statement  under the Securities Act and Form S-1 is the most commonly used registration statement form.  All companies qualify to register securities on Form S-1. Once a S-1 is deemed effective, a sponsoring market maker must file a Form 211 on the issuer’s behalf with the Financial Industry Regulatory Authority (“FINRA”) in order for it to obtain a ticker symbol.
The SEC provides various forms of registration statements for registering securities offerings which vary based upon the characteristics of the issuer and of the particular type of offering. .
What is a Form 10 Registration Statement?
A company can file a Form 10 registration statement under the Securities Exchange Act of 1934 (the “1934 Act”) to register an entire class of securities. A 1933 Act registration registers only a certain number of a particular class of securities.
Unlike a registration statement on Form S-1, a Form 10 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?
The 1934 Act’s Section 12(g)(1) 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 Exchange Act Section 12(g) regardless of its assets, number of shareholders or revenues.
A Form 10 requires that the issuer disclose much of the same information required by Form S-1. 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 audited financial statements.
Upon filing 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 (60) days after its initial filing. Effectiveness causes the issuer to become subject to the SEC’s periodic reporting requirements.
Periodic Reporting After A Form 10 Registration Statement
Once a company has a security registered under the 1934 Act or the 1933 Act, it is required to file annual, quarterly, and current reports with the SEC. An issuer with securities registered under the 1934 Act must additionally comply with SEC proxy rules; and its directors, officers, and holders of ten percent or more of its outstanding securities must also make insider filings related to their benefitical ownership. The issuer’s securities become subject to the short-swing profit rules under Section 16 of the 1934 Act.
Getting a Ticker and Trading After Fililng A Form 10
Even though an issuer that files a Form 10 registration statement becomes subject to the reporting requirements of the 1934 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 and be quoted on OTCMarkets’ Pink Sheets, OTCQB, OTCQX tiers, or list on a securities exchange such as NASDAQ, the AMEX or the NYSE.
Generally, FINRA requires that the issuer have at least 25 shareholders who hold either registered shares or, with respect to Pink Sheet listed issuers, shares that have been held by non-affiliate investors for twelve months. The majority of the 25 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 (“211”).
The Solution
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 possible liabilities including 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 resales. Issuers who go public through direct public offerings avoid the shell company and reverse merger stigma. Another advantage is that issuers who go public directly have lower costs and the added credibility associated with providing transparency by filing an S-1 registration statement with the SEC.

This informational memorandum is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information concerning the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration on Form S-1 and Form 10, Pink Sheet listing, OTCBB and OTCMarkets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings or please contact Hamilton and Associates Securities Lawyers. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney

101 Plaza Real South, Suite 201 South
Boca Raton, Florida 33432 
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

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