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Self Registration

When a company goes public using an S-1 registration, the holders of the stock, if they buy in the offering or if they were shareholders in the company when it was private and get their stock registered in the S-1, have freely trading stock. FINRA will still want to see enough stock in public hands that a market can be developed.

Form 10 Shells

A Form 10 shell is created when a new company is formed and registered under the Securities Exchange Act of 1934 but not the Securities Act of 1933. In other words, the company is registered with the SEC but not the stock.

The idea in doing this is that the company is now a shell company and it is supposed to speed up the process of registering the stock.

If the holders of stock in a company registered under Form 10 have held their stock for the required six months, they may sell under Rule 144 and a market may be created. Or the company may register stock using an S-1.

If a Form 10 is used, the company may continue to solicit private placement money after it files with the SEC. If an S-1 if filed, only if those buyers are already connected to the company can buy while the S-1 is being processed.

Actually, from the company's viewpoint little time is actually saved. While the stock may have a market, until the stock has an actively trading market, private money will be hard to find. The important metric here is not time to trading; it is time to getting money!

One good point about Form 10 shells, they should be clean, eliminating the due diligence issue, which can be impossible in a Pink Sheet shell.

If you use a trading Pink Sheet shell, you will not require audited financial statements. You will need to pay for legal work to buy the shell and get information on your company on Pink Sheets. Your biggest problem will be doing due diligence to make sure the shell is clean, something that is impossible to do absolutely. You do not need to go through the time and expense of having a market maker file a Form 211 with FINRA. You will need to develop a real trading market but you will have a market maker and some shareholders to start. It may take you three months to do this.

If you use a Reg A offering, audited financials are not needed but they must be GAAP. You save the cost of buying a shell. You will have to file with the SEC. Form 211 will have to be filed and a trading market developed. 

If you buy an OTC BB shell, trading, you will have to file the Super 8-K with the SEC. No Form 211 is needed but you will have to develop the market as in the Pink Sheet shell.

If you do an S-1, you need audited financials, a Form 211, and to develop the market.

If you do the Form 10 shell, you will have some cost to buy it, you will file the Super 8-K and the Form 211.

Reasonable men can differ here, but in my not very humble personal opinion, if you really want speed and damn the expense, you want the trading shell. If you want to save money and wait a few months, you want the S-1 self registration.

If you cannot get audited financials, you are stuck with the Pink Sheet shell unless you file a Regulation A offering.

Personally, I do not see the point in doing the Form 10, except for the fact that you can solicit money after filing with the SEC.

Getting Your Stock Trading -- FINRA, Form 211 and Market Makers

To get your stock trading, no matter how you became public, you have to get the stock quoted on the Pink Sheets, OTCBB markets or on a stock exchange. For small companies this means getting the stock trading on the Pink Sheets or OTCBB. 

To have a trading market you need one or more market makers. This market maker must be a broker-dealer who is a member of FINRA and registered with the SEC.

To start trading, one market maker must file a Form 211 with the Financial Industry Regulatory Authority, FINRA, and make a market in your stock.

A FINRA rule says that market makers are not supposed to charge any fee for filing a Form 211. We polled all the market makers listed on Pink Sheets last year and all of them but one wanted a $10,000 “due diligence” fee or some such to file the Form 211. Given the expense and time involved, and the likelihood that filing for a fraudulent company is a bad reflection on them, we can hardly blame them for wanting to do due diligence. Other than that, we believe a market maker should be willing to file a Form 211 if it believed that substantial business would develop in trading the stock. Market makers make money mainly on volume. 

FINRA processes the Form 211 and requires that there be enough non-affiliated shareholders with free trading stock to make trading in the stock possible. They do not want this stock to be concentrated in a few hands.

You will have to document in detail how this stock was offered and sold and prove that this was in full compliance with all the securities laws and rules of the the SEC and the states. This stock has to bought in a bona fide transaction for investment and not simply gifted to the shareholders.

You will have to prove that your company is not a shell as defined in Rule 144. You will have to show that you are in a bona fide business with assets and at least be a development stage company.

You will have to produce a shareholder list from your transfer agent clearly showing free trading stock and an opinion of your securities lawyer that this stock is in fact free trading stock and not restricted.

FINRA may stop the Form 211 if you have any connection with unsavory characters or if there is anything else they do not approve of.

If FINRA does not approve your Form 211, you have the right to appeal to the SEC. We would expect that any such appeal is likely to be unsuccessful.

Getting the right documentation, getting a proper list of shareholders, and selecting a market maker are important steps in the process.


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John Lux, has been an OTC market maker in new issues, shells and other companies, a security analyst, an investment banker, and attorney. He is an investor in venture and public companies.


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Videos

The Venture Capital Process or Why VCs Lose Money

Why Go Public?

Why Go Public, Make an Initial Public Offering, or IPO, or Reverse Merger

What Types of Companies Should Go Public, Make an Initial Public Offering or IPO

How to Sell the Underwriter on Your Initial Public Offering or IPO

The SEC Process for Initial Public Offerings or IPO

Reverse mergers and other ways to get your stock trading in the public market

Problems with Venture Capital and Venture Funding

Marketing Stock -- Reverse Merger -- Public Offering

Need for Audited Financials When Doing an IPO or Reverse Merger to Go Public

Traps for the Unwary When Doing an Initial Public Offering, IPO, or Private Placement

Stops on Going Public, Making an Initial Public Offering, IPO, or Reverse Merger

The Rocket Ride -- Going from Start Up, through Seed Money, Venture Capital, IPO

SEC Rules and a Reverse Merger instead of an IPO

Public Shells or OTC Shells for a Reverse Merger

Problems with using a Public Shell or OTC Shell to Go Public with a Reverse Merger

New Venture Funding

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An Alternative to Venture Capital Funding - Give Control to the Company


The Real Purpose of Corporate Finance


OTC Shells and Reverse Mergers -- The Aftermarket is the Key


Rules For Securities Offerings and Private Placements


Registration Instead of a Reverse Merger to Go Public


Venture Capital Rocket Ride










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