A Shell Stock (Shell Company) is a public company that no longer has any business operations. It retains its capital structure and public trading status with the intention to complete a reverse merger with a non-public company with an on-going business. This merger creates a new company that is both publicly trading and generating revenues. There are many reasons why a Shell Stock exists in the first place, but most commonly they either lost the business due to a bankruptcy, or just sold or closed it.
The SEC (Securities and Exchange Commission), in Rule 12b-2, defines a "Shell Company" as "a registrant with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets." Previously, the SEC referred to a Shell Company as a Blank Check Company.
Why would a private company with an on-going business want to reverse merge into a Shell Stock? The goal of the private company is to become a public company. There are many benefits in becoming a public company. The traditional method of becoming a public company, via an IPO (Initial Public Offering) can be very expensive and time consuming. Becoming public via a reverse merger is less expensive and much quicker.
TYPES OF SHELL STOCKS
Public traded stocks generally fall into one of two categories. Either they report to the SEC or they do not.
Reporting: they are required to file periodic Quarterly and audited Annual financials with the SEC. They also report changes in stock ownership and any material changes in the company's structure.
Non-Reporting: they forgo any reporting to the SEC.
When comparing a REPORTING Shell Stock to a NON-REPORTING Shell Stock, keep in mind that with a REPORTING Shell Stock, you can visit the SEC website and review detailed audited financial and stock owner information. With a NON-REPORTING Shell Stock, you can only rely on what the company chooses to report.
Most investors buy Shell Stocks when there are rumors of a potential reverse merger. But, they become impatient when the reverse merger does not happen and sell . . . usually at a loss.
So what is the best Shell Stock strategy? Probably it is best to buy several Shell Stocks and forget about them. Hopefully you will resist the temptation to sell when things get boring, increasing your chances of participating in a reverse merger - sometimes producing huge returns.