The ideal shell is one that is squeaky clean: well-kept,
organized and current records, with no history of unsavory behavior. These are
not always easy to find. Form 10 shells are formed as blank check companies
solely for the purpose of a reverse merger and generally are much less likely
to raise these concerns. In looking at a shell with issues, the differentiation
between "messy" and "dirty" is critical, because while sounding similar (think
dishes), in the reverse merger world there exist stark differences.
Shells are considered "messy" when there has been no
shady activity suspected but the filings and recordkeeping are disorganized.
This complicates discovering what has actually gone on in the shell prior to
the planned merger. Often information is delivered gradually and is, well,
messy and disorganized. They may be behind in their SEC filings or there may
not be a way to conclusively tell who are the proper legitimate Board members.
And ownership of shares may be problematic, it might be necessary to trace
every securities issuance since inception to be sure. Ultimately, one can hope
that "messy" shells can be scrubbed and brought up to date so that the terms of
the reverse merger are clear.
Conversely, "dirty" shells are characterized by having
some questionable players or actions which are only discovered in due
diligence. Be cautious if it appears the shell is or was an operating
company, be sure that it went public with purposes beyond finding a merger or
risk getting caught in the "footnote 32″ issue with the SEC (if you are
unfamiliar with this term you can search it above for prior blog posts). Most
important: make sure you have experienced and diligent professionals advising
you to make sure the shell you are acquiring is carefully reviewed and, if
necessary, cleaned up.
For additional insights on reverse mergers,
SPACs, other alternatives to traditional initial public offerings, the small
and microcap markets and the economy, visit the Reverse Merger and
SPAC Blog by David N. Feldman, Esq., Partner of Richardson &
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