PINK SHEET SHELL WARNING

As you will learn by reading additional content on this site, I’m not a big fan of Pink Sheet Shells.

Yet I am constantly told by people who visit the site and contact me that they are going to buy a Pink Sheet Shell because they can avoid SEC Reporting and Sarbanes-Oxley Act compliance expenses. That’s true. However, although that’s a benefit, there are significant detriments to buying a Pink Sheet Shell due to recent SEC and FINRA rule changes.

 

 

Here are three important questions to ask the person trying to sell you a Pink Sheet Shell:

QUESTION ONE: When will my current shareholders and I be able to sell our stock on the Pink Sheets after the merger?

Recent SEC changes in Rules 144 and 145 make your stock and that of your stockholders totally, completely, absolutely illiquid and unsellable on the Pink Sheets. Oh, you can fix this. But to do so, you have to become an SEC reporting company. But wasn’t that what you were trying to avoid in the first place? OK, you’ve avoided it, but you and your stockholders can never, ever sell their shares on the Pink Sheets.

Don’t believe me?

Fair enough. Ask the SEC’s expert on shell company transactions. His name is Kevin O’Neill and he is Special Counsel, Office of Small Business Policy. Here’s his telephone number: 202.551.3260.

 

QUESTION TWO: I plan to raise money in a private placement offering after the Pink Sheet Shell Merger closes. When will investors in this offering be able to sell their stock on the Pink Sheets?

The same recent SEC changes in Rules 144 and 145 make your investors’ stock totally, completely, absolutely illiquid and unsellable on the Pink Sheets. Oh, you can fix this. But to do so, you have to become an SEC reporting company. But wasn’t that what you were trying to avoid in the first place? OK, you’ve avoided it, but you and your stockholders can never, ever sell their shares on the Pink Sheets.

Do you think you can sell your stock if you tell investors they will never, ever be able to resell their stock on the Pink Sheets? You can’t hide this fact either, as to do so will subject you to securities fraud lawsuits, which you will almost certainly lose if you don’t make the disclosure.

Don’t believe me?

• Move up to the OTCBB
• Change the Company’s Name
• Reverse Split the stock.

The answer is: Yes, but only if you have all of the following information:

• A full corporate history for the shell including all material facts of the corporate action being requested (Start on the original date of incorporation and include all the corporate changes that have occurred until present day, including, but not limited to, changes of control, reverse mergers, name changes, etc).
• Back to the formation of the shell:  A list of all corporate officers prior to the current officers appointments. This list should include the date of appointment and resignation for each officer on this list and should be accompanied by the executed back up documentation (i.e. signed resignation letters, Board of Directors resolutions with officer appointments included, etc.)
• Back to the formation of the shell:  Provide a regression diagram, from the shareholder list provided, that traces the shares from the current shareholder to their issuance by the shell.  This list should indicate the name and address of the shareholder or transferor, the date of original issuance or transfer, the provision under the Federal Securities Laws or exemption that the Issuer relied upon, and the consideration paid to the issuer or transferor.  Additionally, provide a detailed explanation of the Shell’s nature of business at the time of original share issuance and each subsequent issuance of shares since inception.
• Back to the formation of the shell:  Details surrounding the shell’s offering(s).  Your answer should include, but not be limited to, who solicited investors, how the solicitor knew them, and how many individuals were solicited including those that did not purchase. 

If you do not get this information from the shell promoter at closing, or if it is not available, you are screwed if you want to do any of the corporate actions listed above. That means:

• No move to the OTCBB
• No name change
• No reverse split

 

And for anyone who is still considering a Pink Sheet Shell Merger, I commend to you the following story, which I title:

MY COMPANY IS TOTALLY SCREWED BECAUSE I DID A PINK SHEET SHELL MERGER

The SEC has filed a lawsuit alleging securities fraud by Prime Time Group (now known as Hunt Gold Corp.) and three former officers, for allegedly sending out false press releases about company acquisitions. One of the former executives named in the suit is identified as a South Florida resident – Johnny Ray Arnold of Fort Lauderdale.

He and one of Prime Time’s largest shareholders, John A. Mattera of Boca Raton, are charged with securities antifraud and registration violations for their participation in a scheme to evade registration requirements.

In a press release, the SEC said it temporarily suspended trading in the securities of Hunt Gold Corp. on June 15, because of questions raised about the accuracy and adequacy of publicly disseminated information concerning, among other things, Hunt Gold’s gold mining exploration business.

Hunt Gold President Michael Saner of Johannesburg, South Africa, said in a phone interview that his company had acquired Prime Time around 18 months ago through a reverse merger. Hunt Gold has announced several acquisitions of gold mines in recent months, but Saner said those were legitimate.

“These allegations have nothing to do with the incumbent board whatsoever. But the allegations have basically destroyed the company now,” Saner said.

The complaint, filed in Miami federal court, alleges that between February 2006 and November 2007, Prime Time, Arnold and two other officers – Dallas L. Robinson and Troy K. Metz, both Canadians – distributed false and misleading press releases concerning, among other things, Prime Time’s acquisition and ownership interest in a Puerto Rico convenience store franchise, agreements the company claimed to have with other wireless businesses, and its purported acquisitions of other companies.

The complaint also alleges that Prime Time, Arnold, and Mattera made false statements to the company’s transfer agent in connection with a fraudulent scheme involving the issuance of bogus promissory notes. The scheme allegedly allowed Mattera to obtain millions of unlegended shares of Prime Time stock, most of which he later sold in the open market in November 2007. (Legends are information, such as restrictions, often found on the back of share documents.)

The complaint further alleges that Prime Time, Arnold, and Mattera violated the securities registration provisions by engaging in unregistered distributions of Prime Time stock. For instance, the suit alleges that Prime Time, Arnold, and Mattera engaged in an improper “gypsy swap” transaction in which Mattera agreed to transfer his unlegended shares to various stock promoters on behalf of Prime Time. In return, Mattera received restricted stock from the company. The SEC said the scheme was designed to circumvent the securities registration requirements because Prime Time could not legally issue unrestricted shares to the stock promoters without filing a registration statement.

The suit seeks permanent injunctions and civil penalties against all the defendants, disgorgement plus prejudgment interest against Mattera, and penny stock bars against Arnold, Robinson, Metz, and Mattera.