Many issuers seeking to raise capital often attempt to go public using a reverse merger with a public shell. Blank Check Companies which file Form 10 Registration Statements (“Form 10 Shells”) 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 becoming public; it makes it 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 a Form 10 Shell may incur the expenses of SEC reporting yet derive no benefit because its securities are not publicly traded. As a result, the costs of Form 10 Shells exceed 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, 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?
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.
A Form S-1 Registration under the Securities Act of 1933, as amended (the “Securities Act”) is the most commonly used form for a Securities Act registration statement. All companies qualify to register securities on Form S-1.
A company can also file a registration statement under the Securities Exchange Act of 1934 (the “Exchange Act”) to register an entire class of securities, while a Securities Act registration registers 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?
Exchange Act 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 their assets, number of shareholders or revenues.
A Form 10 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 (60) 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 with the SEC annual, quarterly, and current reports. An Issuer with securities registered under the Exchange Act must additionally comply with SEC proxy rules and its directors, officers, and holders of ten percent or more of its outstanding securities must comply with the beneficial ownership reporting requirements and the issuer’s 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 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 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”).
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 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. Additionally, issuers who go public direct have lower costs and the added credibility associated with providing transparency by filing an S-1 registration statement with the SEC.
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