The first type of abusive shell company transaction involves circumventing the registration and prospectus delivery requirements of the Securities Act Rule 419.  Form S-8 may be used only to register securities for offer and sale in connection with employee benefit plans.  The use of Form S-8 by registrants to raise capital is prohibited.  These changes will eliminate the sale by the company to purported employees who act as underwriters to distribute the securities to the public without the required registration and prospectus delivery.  

The second type of reporting shell company transaction involves the use of Form 8K to report “reverse mergers” and other transactions in which a reporting shell company combines with a formerly private business, with the surviving entity becoming a reporting company in the business conducted by the private company.  However, the existing Form 8K disclosure requirements are not tailored for shell company conversion transactions.  They do not address the reality that a shell company conversion transaction introduces a new reporting company with a new operating business to investors and the public.  The existing Form 8K results in uneven disclosure and lack of information available to investors and the public.  The proposed changes would require a shell company to file the same information required to register a class of securities.

In summary, the proposed rule amendments do not address the relative merits of shell companies.  The SEC recognizes that there are many legitimate reasons for shell companies and they do not intend to imply that shell companies are fraudulent.  The proposed amendments target regulatory problems where shell companies have been used as vehicles to commit fraud and abuse in the regulatory process.  

For more detailed information regarding the proposed changes, please see the Securities and Exchange Commission website at:  www.sec.gov or call Russell Heid or Joe Beach at 215-564-1900 .

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