The U.S. Securities Act of 1933 (“Securities Act”) regulates the origin issue of securities (primary market). The Securities Act of 1934 (“Exchange Act’) regulates the secondary trading of securities (secondary market). It is the Exchange Act that established the U.S. Securities and Exchange Commission (“SEC”), a regulator responsible for the enforcement of U.S. federal securities law. Therefore, a company can issue securities to raise capital for its business. To do business is a matter of the company (issuer). IPO justification, governance, and compliance rules are a matter for the SEC. Likewise, the U.S. Financial Industry Regulatory Authority (“FINRA”) regulates member broker firms and exchange markets.
What is a Shell Company? Securities Act Rue 405 and the Exchange Act Rule 12b-2 defined a Shell Company. A company, other than an asset-backed issuer, with no or nominal operations; and either: no or nominal assets; assets consisting of cash and cash equivalent; or assets consisting of any amount of cash and cash equivalents and nominal other assets.
Billions of dollars were raised from the public through the filing of a registration statement Form S-8. Are the securities of a Shell publicly traded? Yes. Shells are public companies whose shares are listed and traded outside the national stock exchange (NYSE, NASDAQ, and AMEX), that is, over the counter market on a real-time quotation basis. The OTC Markets (OTCQX, OTCQB, and Pink) replacing the popular pink sheet, founded in 1913; 108 years ago. Today, there were about 12,636 securities with a dollar volume of US$2.3 billion (source: OTC Markets as of June 12, 2021).
Is SPAC a Shell? It is a Shell Company when it becomes public without any business and has no assets other than cash (founder members’ (SPAC Sponsors) cash subscriptions and proceeds from IPO).
What M&A approach adopted by SPAC and Shells? Shells applied the reverse merger (reverse take-over) approach. Meaning, a private business merges into a Shell Company and the Shell Company survived with the shareholders of the private business controlling the Shell Company. It is an alternative to the traditional Form S-1 filing an IPO raising capital process. The recent SPAC boom has not shown SPAC engaged in a reverse merger or a de-SPAC transaction. This fact suggests that SPAC Sponsors may wish to continue to have control over the SPAC. The objective test suggests that SPAC is target orientated. Shells focused on a reverse merger. This means a SPAC may identify in the IPO prospectus the specific business targeted for M&A. Usually, the M&A transaction is completed after the IPO.