About the Firm

1
Public Shell and Reverse Merger in the Current
Regulatory Environment Presented by Andrew
Pidgirsky Adams and Reese LLP 1221 McKinney,
Suite 4400 Houston, Texas 77002 September 16,
2005 28th Annual Conference Ukrainian American
Bar Association
2
DEFINITION

• Shell company is 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.

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TYPES OF PUBLIC SHELL COMPANIES

• OTC Bulletin Board
• NQB Pink Sheets
• Registered Rule 419 Blank Check (non-trading
  public reporting company)
• Nasdaq Small-Cap, Nasdaq NMS, NYSE, and AMEX
• Cost about 300,000-500,000
• depends on the super-majority position
• shell shareholders retain interest

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FORMS OF MERGERS

• Reverse Merger the private business merges
  into the shell company, with the shell company
  surviving and the former shareholders of the
  private business controlling the surviving
  entity.
• Back door registration the shell company
  merges into the formerly private company, with
  the formerly private company surviving and the
  shareholders of the shell company becoming
  shareholders of the surviving entity.
• Reverse Triangular Merger is reverse merger
  involving a subsidiary and is most popular
  because it avoids shareholder approval by the
  shell.

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ADVANTAGES OF REVERSE MERGER

• Valuation public companies are valued higher
  than private companies
• Capital Formation raising capital is easier
• Acquisitions acquisitions with public stock are
  much easier
• Incentives stock options are useful in
  attracting management
• Saves money the cost of reverse merger are much
  lower than for IPO
• Saves time is considerably less than for an IPO
• Less risk than IPO IPO may be withdrawn due to
  an unstable market condition

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ADVANTAGES OF REVERSE MERGER (Contd)

• Reduced management time IPOs require greater
  attention from management
• No Underwriter Requirement no underwriter is
  needed
• Reduced dilution less dilution of ownership
  control, compared to a traditional IPO
• Control private company shareholders will own a
  majority of the public company
• Lack of Earning History does not keep a
  privately held company from completing a reverse
  merger

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DISADVANTAGES OF REVERSE MERGER

• No or Little Market Support
• no analysts or market makers
• no major underwriter
• stock trades on pink sheets, OTCBB or NASDAQ
• Insubstantial Funding/private placements are
  difficult due to low valuation
• Low liquidity

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OTHER WAYS TO GO PUBLIC

• Form SB-2 Registration
• Promoter takes stock and dividends to the public
  company shareholders
• Potential delays with SEC review
• File Form 10 or Form 10-SB
• voluntary registration
• no public float
• Rule 144 may be used
• Regulation A, Rule 504

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DISADVANTAGES OF BEING PUBLIC

• Public Reporting
• Dilution
• Expense
• Liability (Sarbanes-Oxley)
• Confidentiality
• Time Involvement

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PREPARATION FOR MERGER

• Locate a Suitable Public Shell
• Make Sure that a Shell is Clean
• due diligence of the private company
• potential litigation
• background of managers and shareholders
• contingencies and
• make sure that there is correct number of
  available authorized stock

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PREPARATION FOR MERGER (Contd)

• Clean up corporate structure
• Set up corporate governance
• Comprehensive Business Plan
• Independent Board of Directors
• Independent Auditing Committee
• Prepare GAAP financial statements
• Management Team (if foreign, includes English
  speaking executives)
• Financial Audit
• Have Public Company Experience
• Experienced public accounting firm and securities
  counsel

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ISSUES TO CLOSE A MERGER

• Business Plan of merger partner
• Management Information
• Audited Financial Information
• Agreement on Structure and Terms of Merger
  (percent of Public Company held, tax
  implications)
• Letter of Intent with Escrow Fee
• Consent of shareholders

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ISSUES TO CLOSE A MERGER (Contd)

• Officers and Directors and new composition
• Post merger structure (share breakdown/domicile)
• Merger Fee in Escrow
• 8-K
• Form 15c2-11 (quotation on OTCBB)
• Fairness Opinion
• Minority Shareholder Issues

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POST-MERGER PLANNING

• Develop and maintain a strategy that creates
  liquidity for the shares
• Identify market makers and brokers
• Develop relationship with institutional investors
• Develop communication program (road show, public
  relationship)

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NEW SEC RELEASE

• Amend use of Form S-8, Form 8-K, and Form 20-F by
  Shell Companies
• Effective Date August 22, 2005
• Purpose protect investors by deterring fraud and
  abuse in securities market
• Fraud includes pump and dump schemes, high
  pressure sales tactics, inadequate disclosure,
  promoters issuing large amounts of securities to
  themselves

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USE OF FORM S-8

• Form S-8 is used to register securities for offer
  or sale in connection with employee benefit plans
• Some shell companies sell securities to employees
  and promoters who act as underwriters to
  distribute the securities to the public without
  registration
• New rule prohibits shell companies from using
  Form S-8 until 60 days after they cease being
  shell companies and file required information
• 60 days to absorb the information provided by the
  company in Form 8-K or other filing
• Exceptions business combination related shell
  company, used to (i) change of domicile or (ii)
  business combination issues

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USE OF FORM 8-K

• Entry into the material agreement requires a
  report under Item 1.01 of Form 8-K by shell
  company
• Completion of the transaction would be reportable
  under either or both Item 2.01 of Form 8-K
  (Completion of Acquisition or Disposition of
  Assets) and Item 5.01 (Changes of Control)
• Audited financial statements and pro forma
  financial information would be required to be
  filed under Item 9.01 of Form 8-K for
  transactions reportable under Item 2.01

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USE OF FORM 8-K (Contd)

• Upon completion of acquisition shell company
  shall include in 8-K report information that is
  required to file for registration a class of
  securities under Section 12 of the Exchange Act
  using Form 10 or Form 10-SB
• Purpose to deter abuse and provide information
  necessary for investment decision
• Time to File within four business days after
  completion of the transaction
• Extension of time permitted to file financial
  statements and pro forma financial information is
  eliminated for shell companies
• Similar requirements for foreign private issuers
  on Form 20-F