Posts Tagged ‘reverse merger’

Denver CO, April 22, 2015 – In the last year I have seen proposals for clients to go public through a reverse merger with a public operating company that was really a shell or “blank-check” company. In both cases during the listing process the SEC commented that the registering company appeared not to have any real assets or operations, appeared to be a shell or blank-check company, and the SEC asked whether the company intended to do a reverse merger in the near future. The companies responded that they did too have a real business (they didn’t), and they had no intention of merging with any company in the future. Almost as soon as the company was registered they were trying to sell a reverse merger / back-door-listing to my client.

A “shell company” is prohibited from taking advantage of many favorable SEC rules for three years after it is no longer a shell, and has extensive 8-K filing requirements. In addition, “blank check” companies are subject to restrictive escrow and use of funds requirements, along with clear risk and disclosure obligations. I advised my client that it would likely bear substantial costs from the previous founders’ lies to the SEC, since the original promoters would be cashed-out and long gone when it came time to pay the piper. We walked away.

Last week the SEC charged 10 people with fraud for lying to the SEC about the shell or “blank-check” status of registered companies bound for reverse mergers.

The SEC announced the charges in a press release on April 16, 2015, stating it brought fraud charges “against 10 individuals involved in a scheme to offer and sell penny stock in undisclosed “blank check” companies bound for reverse mergers while misrepresenting to the public that they were promising startups with business plans. Blank check companies generally have no operations and no value other than their status as a registered entity, which makes them attractive targets for unscrupulous individuals seeking reverse mergers with clean shells ripe for pump-and-dump schemes.”

According to the SEC, the group created undisclosed blank check companies, installed figurehead officers, falsely claimed in registration statements and other SEC filings that the companies were pursuing real business ventures, and concealed from the public that the sole purpose of the companies was entering into reverse mergers so they could profit from the sales.

The SEC is seeking disgorgement of approximately $ 6 million in ill-gotten gains plus prejudgment interest, financial penalties, and permanent injunctions as well as officer-and-director bars and penny stock bars.


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