The Public Shell Rules

Reverse Merger - Public Shell RulesSince 2005, the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have overhauled the rules and regulations applicable to reverse merger transactions. Not only have the SEC and FINRA jumped on the bandwagon to eliminate them, but, as explained below, Depository Trust Company and national securities exchanges have joined in their efforts.

Form 8-K Amendments l Game Changer l Reverse Mergers

Shell companies are required to file extensive information with the SEC on a Current Report on Form 8-K within four days after the completion of a reverse merger. This information is comparable to that found in a Form 10 registration statement. It must include two years of audited financial statements of the post merger entity and unaudited interim periods, as well as comprehensive disclosure of the company’s business plan, risk factors, financial condition, management and properties. The preparation of the information required is comparable to that involved in filing a registration statement with the SEC. Reverse mergers are no longer simple and they do not require less disclosure than a registered offering, nor are they faster than a registered offering. Consider that the required Form 10 information must be filed within four days after the reverse merger.  Any purchase of a public shell company for the contemplated merger must be delayed to allow for time to prepare this information.  That could take 90 days or longer because of the audited financial statement requirement.

Rule 144 Shell Rule l Game Changer l Reverse Merger

Shell brokers continue to cling to the misplaced belief that a reverse merger is a capital raising transaction and come up with all kinds of creative and illegal ways to create free trading shares such as for the settlement of outstanding debt.  The reality is that a Reverse Merger is not a capital raising transaction. Rule 144 can never be used by a company that is a shell company. A common misuse of Rule 144 in reverse mergers involves the issuance of free trading shares to (purported) non-affiliate stockholders in exchange for debt or services.  Since Rule 144 is not available and there is no convertible debt exemption, the issuance of free trading shares under these circumstances is illegal.

This is absolutely prohibited under the securities laws. There is NO exemption from registration that allows a company to issue free trading shares in connection with a reverse merger, even to non-affiliates of the issuer. The only way to issue lawfully free trading shares in a reverse merger is to file a registration statement with the SEC that discloses all required information.

Rule 144 was amended in February of 2008, and it applies to issuers who are present or former shell companies, including companies that were shells prior to the adoption of the amendment.

The SEC addressed the use of Rule 144 by shell companies in its recently released Compliance and Disclosure Interpretations:

Question: If an issuer had previously been a shell company but is an operating company at the time that it issues securities, is the Rule 144 safe harbor available for the resale of such securities if all of the conditions of Rule 144(i)(2) are satisfied at the time for the proposed sale?

Answer: No. Rule 144(i)(1) states that the Rule 144 safe harbor is not available for the resale of securities “initially issued” by a shell company (other than a business combination related shell company) or an issuer that has “at any time previously” been a shell company (other than a business combination related shell company).  Consequently, the Rule 144 safe harbor is not available for the resale of such securities unless and until all of the conditions in Rule 144(i)(2) are satisfied at the time of the proposed sale. [Jan. 26, 2009]

Question: Does Rule 144(i) apply to securities issued before February 15, 2008, which was the effective date of the amendments to Rule 144 in which the Commission adopted Rule 144(i)?

Answer: Yes. [Jan. 26, 2009]

Rule 144 specifies that shareholders of present or former shell companies cannot rely upon Rule 144 to sell their shares until the issuer of the securities has ceased to be a shell and at least one year has elapsed from the time the issuer filed current Form 10 information with the SEC reflecting its non-shell status. This destroys the argument that a reverse merger is faster than filing a registration statement in a direct public offering or IPO. Reverse mergers do not create liquidity, and may permanently destroy any chance of obtaining liquidity because the issuer must jump through numerous hoops to issue free trading shares.

Form S-8 l Game Changer l Reverse Mergers

Form S-8 is a short-form registration statement that is effective upon filing. It can be used to issue the shares registered without a restrictive legend. On July 15, 2005, the SEC amended Form S-8 to prohibit its use by shell companies.

 FINRA Rule 6490 l Game Changer l Reverse Mergers

Issuers engaging in reverse mergers often undergo name changes, stock splits or other corporate change transactions. FINRA Rule 6490 requires issuers to obtain the regulator’s approval for corporate actions and reverse mergers. FINRA approval can literally take months and involve extensive document production and review when a reverse merger is involved. Upon this review, many reverse merger issuers find FINRA will not approve their transactions because they have sketchy corporate records. Additionally, after FINRA completes its review, reverse merger issuers are subject to a review by DTC. During this review, the issuer may lose DTC eligibility and its securities may become subject to DTC chills and global locks. Without DTC eligibility, it is almost impossible for a legitimate company to establish liquidity in its securities.

Stock Exchange Listings l Game Changer l Reverse Mergers

In November 2011, the SEC approved new NASDAQ, NYSE, and NYSE MKT (formerly AMEX) rules that impose more stringent listing requirements on companies that go public through a reverse merger. These rules prohibit a reverse merger company from applying to list until it has completed a one-year “seasoning period” by trading in the U.S. over-the-counter market or on another regulated U.S. or foreign exchange following the reverse merger, and has filed all required reports with the Commission, including audited financial statements. The company must also maintain a minimum share price of $2.00 to $4.00 for at least 30 of the 60 trading days immediately preceding its listing application.

Any private company seeking to go public should proceed with caution when considering whether to engage in a reverse merger. Similarly, investors should proceed with caution when considering whether to invest in reverse merger companies. Many reverse merger issuers either fail or struggle to remain viable. In light of these considerations, private companies should consult a qualified and independent securities attorneys to perform thorough research and due diligence before engaging in a reverse merger.

For further information about reverse mergers, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at or visit This 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 OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct transactions and direct public offerings  please contact Hamilton and Associates at (561) 416-8956 or by email at Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates l Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855