ipo-law.com - Rule 419 Shells

Rule 419 Shells

Since late 2000, we have been actively involved in developing a proprietary structure for blank check companies that are registered under the Securities Act of 1933 in reliance on Rule 419.

Rule 419 is an unusual regulation because it permits the registration and public distribution of shares in a blank company, and then imposes a number of safekeeping, disclosure and reconfirmation requirements on companies that rely on Rule 419, including:

Depositing 90% of the net offering proceeds in escrow until an acquisition has been completed;
Depositing all securities distributed to the public in escrow until an acquisition has been completed;
Conducting a reconfirmation offering to give public stockholders a chance to consider any proposed acquisition;
Giving each public stockholder a chance to either approve the proposed acquisition and keep his shares; or reject the proposed acquisition and get 90% of his money back;
Unwinding all transactions with public stockholders that do not specifically approve the reconfirmation offering; and
Unwinding the entire public distribution if a specified percentage of the public stockholders do not approve the reconfirmation offering, or if an acquisition is not closed within 18 months from the original effective date of our registration statement.

While the technical requirements of Rule 419 would have been tremendously complex and expensive in the 1990s, the emergence of new SEC rules that permit electronic delivery of disclosure documents and reconfirmation correspondence has simplified the process.

In our view, the principal advantages of a Rule 419 shell include:

A truly clean corporate entity that has no business history or potential liabilities;
The ability to register the shares that the shell will issue in connection with an acquisition; and
The ability to adapt the basic structure to the needs of a particular acquisition target.

In short, we believe our proprietary structure gives us the ability to offer real and substantial value to the shareholders of a target company at a competitive cost.

To the best of our knowledge, we are the only law firm in the world that has obtained SEC orders of effectiveness for shell registration statements that include a shelf registration for the shares that will be issued in an acquisition. We have copyrighted our registration statement disclosures and ancillary contracts, and filed two business process patent applications for our proprietary structure.