David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman is quoted in an article on "virgin
shells" in The Reverse Merger Report
for second quarter 2006.
The
Reverse Merger Report Second Quarter
2006 Virgin Shells Cleaner, Cheaper,
Better?
Executives
from investment banks including Rodman
& Renshaw, Westpark Capital, and
Spencer Trask Ventures are increasingly
creating Form 10-SB shell companies,
also known as "virgin shells," as a
vehicle for taking private companies
public.
The first of the recent reverse merger
transactions involving virgin shells
are being completed with concurrent
private placements in the $30 million
to $50 million range.
Filings of 10-SB forms for new, non-trading
shell companies have become a common
occurrence at the SEC in recent months.
Several dozen virgin shells have been
set up this year at an initial cost
of about $25,000 each, to cover accounting,
legal, and regulatory fees.
Another $25,000 is likely needed to
take the shell through the merger process
and get it publicly traded, industry
watchers say.
Investment bank-led enterprises are
behind a large percentage of these deals.
They are setting up several shells at
once, at a fraction of what it would
cost them to buy an existing shell that
already trades.
Only a handful of these shells have
found merger partners this year. With
some of those, investment banks kept
small ownership stakes of less than
2% in the companies their shells merged
with.
Rodman & Renshaw has seen members
of its executive team create five separate
virgin shells this year, under the name
of R&R Acquisition. The strategy
is a new one for Rodman, although the
New York-based investment bank was already
active in the reverse merger market.
Rodman was the lead underwriter for
several SPACs in the past year, which
have raised close to $500 million.
The first of the new R&R shell companies
agreed on March 31 to merge with staffing
company Global Employment Solutions.
R&R founders retained a stake of
1.7% in the newly merged company. The
deal was completed along with a $30
million private placement with Rodman
& Renshaw acting as the placement
agent.
Others, including Los Angeles-based
Westpark Capital, have sold their entire
stakes in their shell companies at the
time of their mergers. The going rate
for flipping these virgin shells now
appears to be around $200,000. That
price is well below what some publicly
trading shells have gone for in the
past year - often more than $300,000
and in some cases $1 million, plus retention
of as much as 10% equity in the surviving
company. Still, virgin shell sale prices
offer sizeable profits for a $25,000
to $50,000 investment made just a few
months earlier.
Many reverse merger specialists say
these profits are not justified and
contend that virgin shells do little
except reduce the time involved should
a private company choose to do a self-filing
to become public.
Cheap Way to Register Shares
A virgin shell company is created when
a newly incorporated blank check firm
with only a handful of officers and
directors voluntarily subjects itself
to SEC reporting requirements by filing
a Form 10-SB, issues initial shares
for a nominal price, and files audited
financial statements.
Within two months of its filing, and
with an initial investment as small
as $20,000, a shell company's registration
statement can be filed and declared
effective. The shell can then be used
to merge with another private company,
with the intention of taking the merged
company public. Stock of the shell company
cannot trade prior to a merger.
These types of shells are seen as advantageous
to other reverse merger vehicles because
of their cost, the speed and simplicity
with which they can be formed, and,
perhaps most importantly, the easy approvals
they have received from the SEC.
Dozens of 10-SB shells have
sailed through the SEC registration
process with few or no comments from
the commission. Meanwhile, more complicated
Rule 419 blank checks and SPACs have
met much stiffer resistance and taken
many months to get approved, according
to David Feldman, a partner at law firm
Feldman Weinstein, who has worked on
many of the 10-SB filings this year.
The Form 10-SB shells may escape more
critical scrutiny from the SEC because
they are formed without public offerings,
and because they honestly disclose their
status as shell companies, Feldman said.
Prices Still In Flux
Like existing public shells, the potential
exists for 10-SB shells to be sold off
to other parties interested in a reverse
merger. Feldman said that a typical
sale price is around $200,000 for a
99% interest in the shell company. It
remains to be seen what, if any, reaction
the Securities and Exchange Commission
might have to flipping these manufactured
shells. Westpark Capital's most recent
sale of a Form 10-SB shell bears that
out. Westpark's president and chief
financial officer created five separate
virgin shells last August, under the
name "SRKP." (Another three SRKP shell
companies were formed earlier by Westpark,
but they used an initial SB-2 filing,
rather than a 10-SB.) Common stock was
registered for a consideration of $25,000
for each of the companies.
The first and only one of the five Westpark-related
10-SB shells to merge thus far was SRKP
4, in a deal reached in late February.
The transaction is with oncology drug
developer Cougar Biotechnology.
The Cougar-SRKP merger deal called for
Westpark's shareholders to sell their
entire stake in the shell company for
$200,000, minus legal and accounting
fees that Cougar incurred as part of
the merger. Filings indicate those professional
fees totaled about $60,000.
Cougar officials announced on April
10 that the merger transaction closed,
along with a $47.7 million private placement
led by Adage Capital Management. No
SEC filings have been made regarding
the private placement; it is unclear
whether Westpark acted as an agent in
the transaction or received additional
payments for its work in the merger.
For some investment banks, the lure
of virgin shells apparently has less
to do with their value than with the
opportunity they can provide to give
a company the banks are already working
with access to public markets. Some
of these banks already have a stake
in the company they are using the shell
vehicle to merge with. Also, these firms
expect to receive equity and fees from
the private placements that go along
with the reverse merger.
That was the case in the first Rodman
& Renshaw reverse merger completed
this year. In the R&R Acquisiton
reverse merger with Colorado-based staffing
firm Global Employment, 98.4% of the
shell company's original shares were
exchanged, with the founders of the
shell retaining the remaining ownership.
The deal was reached on March 31, less
than three months after R&R's initial
Form 10-SB was filed with the SEC. The
company intends to trade on the OTC
Bulletin Board.
Rodman & Renshaw received an additional
2% of the merged company's shares, as
payment for acting as the placement
agent for the concurrent $30 million
private placement.
R&R Acquisition 1 officers invested
$25,000 to purchase two million unregistered
shares of the company when it was first
incorporated in February 2005. Similar
investments were made for the other
four R&R Acquisition 10-SB shells
that were set up at the same time. None
of the other four shells have announced
merger deals.
Among other investment and venture capital
firms taking an interest in virgin shells,
New York's Spencer Trask Ventures has
seen its executives set up three companies
under the "Adagio Acquisition" name.
Each company was formed in late 2005,
with an initial investment of $50,000
each. None of the three has announced
a merger yet.
