Investing in Shell Companies trading Over The Counter (OTC) Pre-Reverse Merger

A reverse takeover or reverse merger (reverse IPO) is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public.  The transaction typically requires reorganization of capitalization of the acquiring company.  In the micro cap sector this is usually done by a small group of individuals, sometimes one individual or company forming a public company that has no activity for the sole purpose of a sale.  One trading strategy involves speculating which company trading OTC will reverse merge with a private company and how the deal will effect the stock price.

If you search the OTCMarkets website for companies, profiles, and stock information, you will find an “industry classification” of each company.  For example, Zurich Insurance Group Ltd. (Symbol: ZURVY) has an industry classification as: 6199 – Finance Services.  These “industry classifications” are usually in a company’s S.E.C. filings and indicate a company’s type of business.  As the S.E.C. website explains:

The Standard Industrial Classification Codes that appear in a company’s disseminated EDGAR filings indicate the company’s type of business. These codes are also used in the Division of Corporation Finance as a basis for assigning review responsibility for the company’s filings. For example, a company whose business was Metal Mining (SIC 1000) would have its filings reviewed by staffers in A/D Office 9.(See The S.E.C. Website for full definition and Code List)

While investing in OTC stocks and micro cap companies, there are two classifications one should ultimately be aware of: 1) 6770 All BLANK CHECKS and 2) 9995 All NON-OPERATING ESTABLISHMENT.  Sometimes you will find a classification specifically stated as a “shell corporation” although not often used.  In totality these classification mean there is no operating business and the OTC trading company is looking to plug a business into the corporation.

If you research the owners of the “shell corporation” trading over the counter, you may find that it is either for sale or about to be purchased by an existing business.  Most purchasers and sellers of these corporations generally restructure the stock and/or workout an agreement where the seller keeps some shares after a business model is plugged in.

For example; a shell company worth $1,000,000 with a $1 stock price and 1 million shares is available for sale or a reverse merger.  The buyer can either buy the whole corporation outright at a discount or receive between 95-75% of the stock and reverse merge the existing business.  This option leaves the seller with shares to sell on the open market as compensation for the sale of his shell company. 

Although a very complex strategy (and one you should not delve into unless your financial acumen is strong) there leaves a lot of room for financial gain if one can maneuver the “pre reverse merger” situation.  Again, this is very complex.  Just know the classification and you potentially can save yourself from investing in a cheap stock that has no business model behind it.  For further information on some of the definitions, the posts on MicroCaps.CO are quite helpful.

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