Shell Company Stock Valuation
Valuing a Shell Company
When a public company elects to become a shell, it files Form 15, which is a very brief notification to the SEC that the company is suspending its duty to file reports with the SEC. At this point, operational control of the entity is frequently placed with an attorney who specializes in shell companies. The attorney will attend the minimum number of required board meetings, authorize audits, and file tax returns for the shell for a number of years, while the shell “lies fallow.” The attorney’s intent during this period is to wait for the statute of limitations to eliminate the risk that the shell can incur any liabilities, especially from lawsuits. Thus, the best shell companies have been sitting quietly for a number of years. The attorney may take additional steps to modify the shell’s articles of incorporation or bylaws, if those documents contain provisions that would be less likely to attract an eventual buyer for the shell. Also, if there are too many shares outstanding, the attorney can engineer a reverse split to shrink the number of shares.
There may still be a tiny market for the company’s shares, which may continue to trade on the over-the-counter (OTC) market. Shares will typically trade at a few pennies on the dollar. The shares value is derived from the market’s perceived estimate of the price at which the shell can eventually be sold to a buyer.
The Price of a Public Shell
When a company wants to buy a shell, it could pay anywhere between $100,000 to $1,000,000 for the entity, with the price increasing if the shell is perceived to be an unusually clean one, with minimal likelihood of undocumented liabilities.
Types of Public Shell Companies
There are numerous types of public shells available. Some are publicly traded, while others may or may not file reports with the U.S. Securities and Exchange Commission (SEC). Some even have cash on hand and are looking for just the right private operating company to conduct a reverse merger. Below is a summary of typical public shell vehicles and their usual cost ranges. The cost estimates assume the public shells have no assets and no liabilities. Public shells with cash on hand and other assets often cost many times more than those without such assets. Whereas public shells with outstanding liabilities can be purchased for lesser amounts but come with a long list of “clean-up” problems. Public companies with net operating loss carry-forwards can often add value.
OTC Bulletin Board – The most popular type of public shell for conducting a reverse merger is the OTC Bulletin Board public shell vehicle. The OTC Bulletin Board is operated by the National Association of Securities Dealers (NASD) and requires that all companies whose stock is traded on the OTC Bulletin Board (or NASDAQ or Amex) maintain their current reporting status with the SEC, which includes current audited financial statements. OTC Bulletin Board shells come in various forms and packages.
Cost: (non-trading) $250,000 – $450,000, plus 5 – 20% retained equity ownership
(trading) $250,000 – $800,000+, plus 5 – 20% retained equity ownership
NQB Pink Sheets – Often referred to as “pinks,” shell companies are listed by the National Quotation Bureau (NQB). Neither the NASD nor the SEC requires companies quoted in the Pink Sheets to maintain current reporting status or undertake costly annual audits. These shell companies also come in various forms and packages.
Cost: (non-trading) $150,000 – $350,000, plus 5 – 20% retained equity ownership
(trading) $250,000 – $400,000+, plus 5 – 20% retained equity ownership
Registered Rule 419 “Blank Check“ – A “Blank Check” company is one that was formed with the sole purpose of becoming a public shell company. Blank check companies have no ongoing business activity and no business purpose except to acquire and merge with an existing private business wishing to go public quickly. All of Stag Financial Group’s blank check companies are fully registered with the Securities and Exchange Commission (SEC) under Rule 419 of the Securities Act of 1933, as amended. Blank check companies are non-trading until after the reverse merger is completed and then will typically trade on the OTC Bulletin Board.
Cost: $150,000 – $350,000, plus 5 – 20% retained equity ownership
NASDAQ Small-Cap, NASDAQ NMS, NYSE, and Amex – While the OTC Bulletin Board is an excellent stock market and the NQB Pink Sheets are gaining a following, some clients are interested in trading on one of the more mature U.S. stock markets, such as the NASDAQ Small-Cap, NASDAQ NMS, NYSE or Amex. The listing requirements, depending on the exchange, consider different measurements, including asset levels, number of shareholders, required committees, and market capitalization. There are also secondary stock exchanges such as the Boston Stock Exchange and Pacific Stock Exchange. Stag Financial Group can assess whether a company qualifies for one of these stock exchanges and, if not, help the company obtain a listing when it meets the minimum requirements for such a listing.
Cost: $3,000,000 – $100,000,000+, plus 30 – 70% retained equity ownership
Application of ASC 820 – Fair Value Measurement for Inactive Markets
ASC 820-10-35-54C through 35-54H addresses valuations in markets that are inactive in the current reporting period.
The fair value standards provided additional factors to consider in measuring fair value when there is low market activity for an asset or a liability and quoted prices are associated with transactions that are not orderly. For those measurements, pricing inputs for referenced transactions may be less relevant. A reporting entity should determine if a pricing input for an inactive security was “orderly” and representative of fair value by assessing if it has the information to determine that the transaction is not forced or distressed. If it cannot make that determination, the input needs to be considered.
This ASC provides a list of factors to consider in determining whether the volume or level of activity is in relation to normal market activity. The factors that an entity should evaluate include, but are not limited to, the following:
- There is an absence of a market for new issues (that is, a primary market) for that asset or liability or similar assets or liabilities.
- There are few orderly transactions.
- Price quotations are not developed using relevant or current information.
- Price quotations vary substantially either over time or among market makers (for example, some brokered markets).
- There is a wide bid-ask spread or significant increases in the bid-ask.
- Little information is publicly available (for example, a principal-to-principal market).
If a reporting entity concludes that the volume or level of activity in the market for an asset or liability is low, the reporting entity should perform further analysis of the transactions or quoted prices observed in that market. Further analysis is required because the transactions or quoted prices may not be determinative of fair value, and significant adjustments may be necessary when using the information in estimating fair value.
SHELL COMPANY EXPERTS