Although you know we do believe that a public shell reverse merger is appropriate in some situations, we continue to urge anyone considering going public this way to exercise extreme caution.
My good friend Securities Attorney Brenda Hamilton has written an excellent post at www.securitieslawyer101.com disclosing another serious potential pitfall to reverse merger transactions: THE HIJACKED PUBLIC SHELL!
Unbeknownst to you, the poor unsuspecting buyer of what purports to be a “clean” public shell, you are really getting a shell that has been hijacked. Don’t be misled, even if the shell seems really great because it even comes with promises of “all inclusive SEC legal work.” If you want to avoid being victim to hijacked shell fraud, I commend her post to you, as follows:
Corporate hijackings, also known as corporate identity theft, of public shell companies has been around for more than a decade. It is a growing method used by fraudsters to acquire control of publicly traded shell companies to use in reverse merger transactions involving private companies seeking to go public. Recent SEC cases against hijackers have unraveled a myriad of hijacking schemes varying in sophistication. It is relatively easy to locate information about a public company using EDGAR, OTC Markets filings, Secretary of State websites and corporate filings, company websites, and business and other directories. Using these sources to locate public shell companies for reverse merger transactions, fraudsters are able to determine a public company’s corporate status.
Public Information That Helps the Hijackers
Available information includes whether the corporate entity is active or inactive, its current ticker symbol, present and former officers and directors as well as its contact information. Private companies who fall prey to these fraudsters fail to recognize that it is less costly and time consuming to go public by filing a registration statement with the SEC for a direct public offering. Hijackers benefit from arranging reverse merger transactions instead of SEC registration statements because reverse mergers make it easy for them to avoid providing disclosure of prior disciplinary and/or regulatory background information that would likely be discovered during the SEC registration statement process.
How Corporate Hijackers Take Over
Using this information hijackers can determine if an entity’s corporate status has lapsed and when a company becomes delinquent in its SEC, OTC Markets and Secretary of State corporate filings, making it an easy target for a corporate hijacking. Using easily obtained public information, fraudsters have literally hijacked hundreds of companies and/or their stock symbols and sold these companies to private companies seeking to go public.
In the state of Florida, some hijackers file verified pleadings under Florida Statute 607.1430 and 607.1434, falsely stating that the Public Shell’s directors are deadlocked and its shareholders are unable to break the deadlock. In reality, there is no deadlock. We have reviewed numerous hijacking cases brought under Florida law where corporate hijackers have falsely represented the board of directors was deadlocked when in reality the corporation had only one director! Often by the time these hijackers are caught by management, they have undergone various acts which cause irreparable harm to the corporation including massive dilution to the legitimate shareholders.
In reality, there is no deadlock. In numerous hijacking cases, we have found the foregoing sections being used by hijackers of corporations with one director!
Upon identifying the hijacking target, fraudsters may engage in some or all of the following in order to obtain control of the public shell company:
♦ obtain forms from the relevant Secretary of State website and pay a nominal fee to reinstate the dormant entity and change its officers, directors and contact information to that of the hijacker or its nominees;
♦ file a state custodianship or receivership action where the entity is formed using pleadings that falsely state among other things, that a custodian or receiver selected by the hijackers will take actions to benefit the then existing shareholders;
♦ change the hijacked entity’s corporate name and/ or create a new entity with the same or a similar name, often in a different jurisdiction;
♦ reverse split, restructure, reorganize and/or change the jurisdiction of the hijacked entity by merging it into the newly formed entity to conceal its true identity;
♦ issue shares to the hijackers, receiver or custodian and nominees, which substantially dilute the then shareholders;
♦ sell the hijacked entity to a private company seeking to be publicly traded for use in a reverse merger transaction with the proceeds of the sale being used to compensate the hijacker and the custodian or receiver;
♦ notify the Financial Industry Regulatory Authority (“FINRA”), the company’s transfer agent and CUSIP Services of the reverse merger, new management and/or reorganization of the entity; and
♦ commence making filings on the OTC Market or EDGAR.
Corporate Hijackings – Red Flags
Private companies considering a reverse merger transaction, as well as investors should look for these common red flags often found in corporate hijackings of public shell companies:
♦ changes in management of the public shell company while it is inactive or shortly after its corporate charter is reinstated;
♦ state receivership or custodianship proceedings followed by reverse stock splits and/or large stock issuances which transfer shareholder voting control;
♦ recent transfers of stock between entities or persons who received shares for services rendered in receivership or custodianship proceedings;
♦ periods of inactivity in the Secretary of State corporate records of the public shell company;
♦ reinstatement of an administratively dissolved corporate entity with the Secretary of State where the public shell company is domiciled;
♦ changes in the state of domicile of the public shell company;
♦ multiple corporations domiciled in the same state or different states with the same or similar names, which are controlled by the same person or persons;
♦ accountants, lawyers and transfer agent principals and their family members and/or employees having voting control or beneficial stock positions of the public shell company;
♦ changes of control or corporate name changes at times when the public shell company does not have an active business; and
♦ involvement of persons or entities in multiple public shell company or reverse merger transactions.
Regaining Control of the Hijacked Corporation
For the legitimate shareholders and management, it is timely and costly to regain control of a hijacked entity. The hijacked entities are often used in pump and dump schemes by the hijackers causing the private company purchasers to become embroiled in SEC investigations and the public entity to be the subject of SEC trading suspensions and its securities subject to DTC Chills and/or global locks.
To the extent that a private company is willing to expend the time and resources to become public it should do so the proper way by filing a registration statement with the SEC and conducting an underwritten or direct public offering and avoiding the growing risks and new requirements involving reverse merger issuers including corporate hijackings.
This securities law blog post was written by Securities Lawyer Brenda Hamilton and is being provided by Securities Attorney Michael T. Williams, Esq., principal of Williams Securities Law Firm, P.A. and is subject to the Disclaimer set forth on the firm’s website.
Contact us for more information about reverse mergers as well as any other going public direct or securities law matter.
And look for our new book “Seeking Your Fortune: Using IPO Alternatives to Find Wealth in the U.S. Stock Markets,” coming in February. Visit our Book Site to sign up, and we’ll let you know when it’s back from the publisher and available for purchase.