Reverse Merger Information

How to go public using an OTC Shell to do a Reverse Merger

Reverse Merger FAQ

How do I find a public shell?

Shells are sometimes advertised for sale in financial newspapers and on the Internet.

What is important in the public shell?

First, you want to know that the shell is a clean public shell — without liabilities, hidden costs, threatened lawsuits, undisclosed warrants or stock options that could come to haunt you after you put your company in the shell. You must do good due diligence on the shell.

Next, you want to know all about the capitalization of the company, its corporate charter, by-laws, and other legal matters.

What do I need to have to do the merger?

You will want to have your company in shape to go public. You should review all your corporate documents and make any changes you want to make before you do the merger. You will also need to have accounting statements. We can give you a checklist of everything you need. Ask for it –

Note: The SEC has new rules governing shell deals. See SEC Release No. 33-8587. To find out what this means to you, contact us.

How do I know what my company’s stock will trade for after the merger?

Nobody will know for certain until the deal is done, but we can give you an opinion for a small fee.

What is the SEC’s position on reverse mergers?

The SEC has issued a warning on reverse mergers to investors:

The SEC has tightened rules on reverse mergers due to recent Chinese-based reverse merger frauds, see SEC weighs new policies on foreign reverse mergers

What is wrong with Chinese reverse mergers?

In the last few years, many Chinese companies did reverse mergers with public shells in the U.S.

In the last year, it has been discovered that many of the Chinese companies took advantage of the lax due diligence process and lack of effective accounting oversight in China to commit fraud. Apparently Chinese business ethics are not up to U.S. expectations. Most of these frauds were accounting frauds and misrepresentation.

Short sellers have capitalized on this situation by selling these stocks and engaging in negative public relations activities.

The SEC has taken this opportunity to review the regulation of all reverse mergers.

We can expect reverse mergers to be under a cloud as a result.

Are reverse merger companies good investments?

Absolutely not. At most, they are speculative companies, and while some of them will be profitable speculations, none of them are investment quality stocks.

They are only for sophisticated investors who understand what they are doing and can afford the risk.

For a sophisticated few, there have been large profits to be made in buying shell stocks before a merger, but this is very, very speculative and again only for the sophisticated speculator who can understand and afford the risk. (See How to Pick Hot Reverse Merger Penny Stocks on

In actual fact, most reverse merger companies wind up as losing investments if you compare their post-merger prices right after the merger with the prices of these stocks years later.

There are many reasons for this: inexperienced managements, weak business plans, over-promoted stocks, and plain old fraud.

What is the best procedure for my company?

The exact path for your company depends on your individual situation. Generally the important factors are the goals and purposes that are important to you and your company, the condition of the business of your company, the amount you can afford to pay for a shell, if you can get audited financial statements, the attractiveness of your company to investors, the number of shareholders you have now, but there are many other factors that may be involved.

How long will it take, what will it cost?

This will vary according to the path you take. In an extreme case, it could take months to get audited financial statements, get through the SEC, do due diligence and negotiate acquisition of a shell, and many of the other factors. On the other hand, you can merge with a trading Pink Sheet shell in a matter of days.

The cost of shells has been declining from the effect of the recent Chinese reverse merger scandals. You may buy a Pink Sheet shell for $120,000 or less, and an SEC reporting OTC BB shell for $250-400,000 or less.

Should I buy a non-trading shell?

This is not recommended. You will have to file a Form 211 with FINRA to get the shell trading. This may take some time and effort and if the documentation is bad enough, you may not be able to clean it up at all.

Why do shell prices vary so much?

Shell prices vary according to whether the shell is a Pink Sheet or OTC BB shell, if the shell has any assets in it, the amount of shareholders and the trading volume in the shell now, and many other factors.

I have seen a shell offered to a company for no cash consideration because the control shareholder of the shell knew that his stock would be very valuable after the merger. He knew this because of the experience and reputation of the promoters of the operating company.

How much of the shell can I buy?

You do not want to buy 100% of the shell as some have said to me because if you do it is no longer a public company.

The amount of stock left in the hands of the shell shareholders will be negotiated along with the cash consideration. The more cash that is paid, the less of the stock will be left with the original shell shareholders.

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About John Lux

Securities attorney, former market maker, futures trader, IPO underwriter, investment banker, securities analyst, "quant," venture company president, venture capitalist. Degrees in quantitative analysis and law. Author of "How to Find a Home Run Stock," "How to Pick Hot Reverse Merger Penny Stocks," "How the Shorts Raid Your Stock, Destroy Your Company and What to Do About It," and "Bash the Stock Bashers."
John E. Lux
1497 Main Street #363
Dunedin, Florida 34698

"Theory without nerve doesn't lead to action -- and in the stock market, it's action that makes you money." eaglepoint


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