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