SEC Adopts New Rules Governing Public Shells

2005-09-01T12:31:00.000-07:00

The SEC has adopted new rules pertaining to public shells because of the many abuses of people promoting their use.

SEC Adopts New Rules Governing Public Shells

July 29, 2005

On June 30, 2005, the Securities and Exchange Commission (SEC) adopted rules regarding publicly reporting "shell companies." The rules are designed to ensure that investors in shell companies that acquire operations have timely access to the same type of information as is available to investors in public companies generally. The rules will become effective on August 22, 2005, except new Item 5.06 to Form 8-K, which will become effective on November 7, 2005.

As adopted, the rules will:

require a public shell company to report on Form 8-K an event that causes it to cease being a shell company and to include in that Form 8-K the same type of detailed financial and other information about the company as is required to register a class of securities under the Securities Exchange Act of 1934 (Exchange Act);
prohibit a public shell company from using Form S-8 (the abbreviated registration statement used to register securities issued under employee benefit plans) until 60 days after it ceases to be a shell company; and
require every public company to check a box on the cover of all annual and quarterly reports to identify whether or not it is a shell company.

Why

The SEC has long been concerned with abuse involving public shells. In these schemes, shell promoters put people into shells when it is completely unnecessary. The shell then acquires or merges with a private operating company in a "reverse merger" in which the owners of the private company receive a significant majority of the stock of the public shell. Prior to the new rules, financial statements of the acquired private company were not required to be filed until 75 days after completion of the merger and detailed information about the business and management of the acquired private company was not required until the shell filed its next annual report on Form 10-K. As a result, securities of the former shell could be traded for up to 75 days with investors having little or no access to vital information about the acquired private company. During this time, the promoters "pump" up the stock to artificially high prices, through press releases, Internet postings and similar means, then "dump" their stock and stop their promotional activities, causing the stock price to fall after they have realized substantial profits.

To be continued..

Reverse Mergers, Public Shells, Going Public

SEC Adopts New Rules Governing Public Shells

Why