The marketplace for shells generally deems its shareholder base as an asset. The more shareholders a shell has, the better. Why? Several reasons. First, in general the more shareholders the more likely it is that heavier trading will develop, so goes the theory. Second, the OTC Bulletin Board unofficially requires at least 35-40 unaffiliated shareholders, each with at least 100 tradable shares (known as "round lot shareholders"). Larger exchanges such as Nasdaq and the NYSE AMEX require 400 or 500 round lot shareholders. Thus a shell with 40 or 400 shareholders arguably has value. But ask yourself – who are these shareholders? They invested in some other company and now are being depended on to develop a positive attitude and start trading their stock based on an entirely different company merging in. Sometimes the opposite happens and a trading shell's stock trades down after a reverse merger is closed. Second, the stronger that shareholder base the more you will pay for a shell. It is often part of the reason that shells trading on the OTCBB sell for over $400,000, plus equity, when Form 10 shells which are not trading sell for maybe even one-tenth of that. So is it worth paying extra for the shareholder base? Sometimes. If you don't have a mechanism to bring in shareholders yourself, or if you want to uplist to a major exchange immediately, that base can be an attractive asset. However, in many cases where companies completing reverse mergers want to trade on the OTCBB, and do not have 35-40 round lot holders, a small "friends and family" round of sales of stock by the company solves the problem very quickly. Remember people can buy as few as 100 shares, so the dilutive impact can be quite minimal. But how do you get the 400 shareholders if you don't have them to trade on higher exchanges? Well, several Form 10 shell principals have gone and sold stock privately to 400 "accredited" investors before even identifying a possible acquisition. The stock remains untradable until a merger and subsequent SEC registration, but when you complete that registration you will not be denied a listing on the Nasdaq for lack of the right number of shareholders. The other method used is the so-called "WRASP" or two-step process to get to a larger exchange that has been completed several dozen times. Here as we have talked about in prior posts, a Form 10 shell with even one shareholder merges with a private company and completes a PIPE. Then two registrations are completed – one to register the PIPE investors' shares for resale, the other for a new public offering by the company that raises additional funds AND brings in at least 400 shareholders with the help of a group of underwriters. So think before spending a lot to buy a shell just because it has a shareholder base. There may be circumstances where it makes sense, but in many cases may not be a necessary expense.
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