Thursday, March 22, 2007 8:57:20 AM
GLOSSARY OF REVERSE MERGER TERMS:
http://www.dealflowmedia.com/publications/reversemergers-glossary.html
These terms and definitions are extracted from the book Reverse Mergers: Taking a Company Public Without an IPO and appear here courtesy of Bloomberg Press.
4(2) analysis. The method by which one determines whether a private offering is exempt from registration with the SEC because the issuer is involved with a nonpublic offering.
accredited investor. As defined in Rule 501 under Regulation D, refers to the type of investor that is not required to receive detailed offering materials in a Regulation D offering. Generally means an individual with $200,000 in recent and expected annual income (or $300,000 when combined with one's spouse) or $1 million in net worth, a broker-dealer, bank or institution, any entity not formed for the purpose of the investment in question with at least $5 million in assets, or an entity all of whose equity owners are accredited.
Advisory Committee on Smaller Public Companies. Group established by the SEC in 2005 to review all aspects of SEC regulation of public companies with less than a $700 million market capitalization. The final report from the committee was issued in April 2006.
affiliate. A person or entity which controls another, is controlled by another, or is under common control with another. In a corporation, affiliate status is presumed if one is an officer or director or control shareholder (generally holding at least 20 percent of the outstanding capital stock).
aftermarket. Trading activity of a stock immediately following the event by which an operating business's stock becomes publicly tradable. More commonly referred to in connection with an IPO, but also applies following a reverse merger.
aftermarket support. The extent to which brokerage firms and market makers and their customers participate in the aftermarket following a reverse merger or self-filing.
alternative investment market (AIM). A stock exchange based in London, England which lists stocks of companies that may not qualify for the London Stock Exchange or similar broader exchanges.
alternative public offering (APO). Somewhat misleading term used to refer to the variety of methods of going public other than an IPO. The term generally describes reverse mergers, self-filings, Rule 504 offerings, and Regulation A offerings; however, a number of these methods do not include public offerings, which is why the term is somewhat misleading.
American Stock Exchange. A major U.S. exchange where a public company's shares can trade. Listing and maintenance requirements are more stringent than on the Over-the-Counter Bulletin Board, but it is generally considered easier to list on the American Stock Exchange than on the Nasdaq or the New York Stock Exchange.
asset acquisition. One method used to complete the combination of two entities. Rather than a direct merger or share exchange, one entity, in the case of a reverse merger typically the public shell, acquires the assets of an operating business.
audit. Detailed review of a company's financial statements and performance, where thorough checks of inventory, expenses, revenues, and the like are performed by an independent certified public accounting firm. SEC rules under the Sarbanes-Oxley Act of 2002 require an audit of a public company to be performed by an accounting firm that is registered with the Public Company Accounting Oversight Board.
audited financials. The state of a company's financial statements after being approved by an auditor.
auditor. The accounting firm performing a financial audit.
backdoor registration. A method by which a company's shares can become publicly tradable through a merger directly with a public shell, after which the private operating company survives the merger and succeeds to the public status of the shell.
bankrupt shell. A public shell that has been created either through issuance of shares following a bankruptcy (these shares are publicly tradable under a provision of the Bankruptcy Code) or a public operating business that was sold or liquidated through a bankruptcy, leaving behind a public shell with virtually no liabilities.
beneficial owner. Either the record owner of securities or someone deemed to be the owner of securities under applicable SEC rules. Examples of beneficial ownership include the presumption that one owns shares which underlie currently exercisable options or warrants, or shares owned by one's spouse.
blank check. As defined in SEC Rule 419, a development stage company with no business plan or whose business plan is to merge with or acquire an operating business. Also referred to as a blank check company.
blank check company. See blank check.
blank check preferred stock. In a corporation's certificate of incorporation, it may authorize the issuance of preferred stock. If that authorization includes granting the board of directors the power to determine the rights, powers, and preferences of the preferred stock without further shareholder approval, it is known as blank check preferred stock.
blind pool. Term used by some in the industry to refer to a blank check which is raising or which has raised money.
blue sky laws. Securities laws and regulations in each of the fifty states, regulating the offering of securities in that state. According to www.investopedia.com, the term is said to have originated in the early 1900s when a Supreme Court justice declared his desire to protect investors from speculative ventures that had "as much value as a patch of blue sky."
board. See board of directors.
board of directors. Governing body of a U.S. corporation. Shareholders generally elect members of the board of directors, which is granted broad powers to elect officers such as the president and secretary and oversee a corporation's business. Also referred to simply as a board.
broker-dealer. A firm engaged in the business of effecting securities and other transactions for the accounts of others. They are required to be registered with the SEC and the NASD.
bulletin board shell. A blank check or shell company whose securities trade on the Over-the-Counter Bulletin Board.
bylaws. Set of rules governing many aspects of a corporation's business, including the process of electing officers and directors, calling and conducting meetings, and defining protocols related to shareholders and stock certificates.
cash-and-carry shell. A shell company whose owners wish to sell most or all of the shell's ownership for cash, rather than participate as equity holders in a merger with an operating business.
cashless exercise. The right to exercise an option or warrant without paying the cash exercise price, by returning other options or warrants for their value, which is determined by subtracting the exercise price from the stock's trading price. As an example, if one holds one hundred options exercisable at $1 each, and the stock's trading price is $2, one could return 50 options as the exercise price for the other 50.
certificate of incorporation. The filing with a U.S. state's government (typically the Department of State) to create a corporation. Some states use the term articles of incorporation, and often the term charter refers to this document. Typically includes the number and type of shares of stock which are authorized, the corporation's name, and limitation of liability of corporate directors. Also referred to as a corporate charter.
change of control. A transaction pursuant to which a company's shareholdings, board of directors, and/or officers undergo a majority change. This can occur as a result of the sale of a company, the accumulation of stock by an unfriendly acquirer, or a shake-up resulting from a shareholder vote expressing dissatisfaction with a board or management's performance.
clean shell. A shell company which has no liabilities or other negative attributes as perceived by an operating business seeking to merge with it.
contemporaneous financing. A common technique in reverse mergers where an operating business combining with a shell company raises money at the same time as the completion of the merger, typically through a PIPE or other private placement.
controlling shareholders. Those who have the ability, through their ownership of shares of stock of a corporation, to approve matters required to be approved by shareholders, or to elect the board of directors.
convertible debt. Indebtedness of a corporation, the holder of which has the right to exchange or convert monies owed into stock at a negotiated price.
convertible preferred stock. Preferred stock of a corporation, the holder of which has the right to exchange or convert shares into shares of the corporation's common stock at a negotiated conversion price.
corporate charter. See certificate of incorporation.
corporate director. A member of a corporation's board of directors.
corporate officer. An individual elected by the board of directors to be an officer of a corporation. Most states require every corporation to have a president and secretary, but additional officers may be appointed and may include treasurer, vice president, chief executive officer, and chief financial officer. Individuals with titles resembling those of corporate officers are not corporate officers unless elected by the board of directors. Officers have certain fiduciary duties to the board and the corporation's shareholders.
current report. A filing with the SEC, most commonly on Form 8-K, describing an event or transaction that has taken place between the company's filings of periodic reports.
CUSIP number. An identification code issued by the CUSIP bureau identifying a class of stock. Publicly trading securities are required to have a CUSIP number.
delist. To remove a company's securities from a particular market or exchange so that they cannot trade on that market or exchange. Sometimes, a company voluntarily delists, in other cases delisting is involuntary for failure to meet a market or exchange's listing standards.
demand registration rights. The right for a holder of a company's securities to require the company, typically at the company's expense, to file and seek effectiveness of a resale registration statement including those securities.
Depository Trust Company (DTC). The custodian of records reflecting electronic representation of ownership of publicly tradable securities. DTC also serves as record owner on a company's records of all shares held electronically where a physical stock certificate has not been issued.
deregister. Commonly used term to refer to the process by which a reporting company voluntarily seeks to terminate its status as a reporting company, typically through filing of SEC Form 15, which is generally available only if a company has fewer than 300 shareholders of record. The SEC also has the power to effect an involuntary deregistration for failure to follow their regulations.
dilution. The reduction in either percentage ownership or value of one's ownership interest resulting from additional issuances of securities of a company.
dirty shell. A shell company in which it appears shady players have been involved and undertaken questionable transactions or tactics that have the effect of reducing the shell's desirability to a merger partner.
due diligence. The process of reviewing a company's operating history, assets, liabilities, risks, uncertainties, and management in anticipation of entering into a transaction with that company.
EDGAR. The SEC's Electronic Data Gathering, Analysis, and Retrieval system of filing virtually all SEC filings. EDGAR has been fully effective since 1996.
equity. Ownership of a business, whether through shares of stock of a corporation, membership interests in a limited liability company, partnership interests in a partnership, or securities granting the right to acquire any such interests.
escrow. The process by which a third party, at the request of parties to a transaction, holds money or other property as the agent of the parties, with such money or property being released pursuant to the instructions of the parties.
exemptions from registration. The opportunity for securities of a corporation to be sold publicly without being registered with the SEC. The most common exemption is Rule 144.
exit strategy. Term used by venture capitalists and private equity investors referring to the method by which they might liquidate an investment in a company.
fairness opinion. Advice from an independent third party that a particular transaction is fair from a financial point of view. Typically, this advice provides a board of directors with greater comfort as to the value of a transaction, and is particularly helpful when members of the board or shareholders have a conflict of interest in the transaction.
firm commitment underwriting. Public offering of securities in which the underwriter agrees to purchase all securities offered by the company. It then resells the securities to its customers after having purchased the shares at a discount from the company. Distinguished from best efforts underwriting, whereby the underwriter simply promises to use its best efforts to resell the shares.
float. Shares of a publicly held company that are tradable by the public. Most definitions of float exclude shares held by officers, directors, and other affiliates. Also referred to as public float.
follow-on offering. Sale of a company's securities to the public after the company is already public by way of an event such as either an IPO or reverse merger.
Footnote 32. Note in the SEC's June 2005 reverse merger rulemaking which acknowledges a questionable tactic whereby individuals take supposedly operating companies public with the intention of shutting down or spinning off the business upon a reverse merger. This allows the promoter to avoid Rule 419 restrictions. The SEC declares these entities shell companies.
Footnote 32 shell. Shells created when individuals take supposedly operating companies public with the intention of shutting down or spinning off the company upon a reverse merger. This allows the promoter to avoid Rule 419 restrictions. The SEC declared these entities as shell companies in its June 2005 rulemaking.
Form 10-K. Annual report filed with the SEC by a company that does not qualify to report under Regulation S-B. Includes detailed company information and three years of audited financials.
Form 10-KSB. Annual report filed with the SEC by a company that qualifies to report under Regulation S-B. Includes detailed company information and two years of audited financials.
Form 10-SB. Registration statement under the Securities Exchange Act of 1934 which registers a class of securities with the SEC but does not register any individual shares for public sale. After effectiveness of the filing, the company is an SEC reporting company.
Form 10-SB registration. The process of filing and seeking effectiveness of Form 10-SB. Filing is automatically effective sixty days after filing. If SEC comments are outstanding after sixty days, they are dealt with through a post-effective amendment.
Form 10-SB shell. Shell company created by filing Form 10-SB on behalf of previously private shell. Creates a clean but nontrading shell.
Form 15. Filing with the SEC undertaken to deregister.
Form 211. Filing with the NASD undertaken by a market maker to commence trading of a company's securities on the Pink Sheets or Over-the-Counter Bulletin Board.
Form 8-A. Simple SEC filing under the Securities Exchange Act of 1934 after which a company is an SEC reporting company, in lieu of using the more complex Form 10-SB. Can only be used by the end of the first fiscal year after a company completes a registration under the Securities Act of 1933, or under certain other limited circumstances.
Form 8-K. Current report required to be filed by reporting companies between periodic reports when certain material events occur, including a reverse merger. The timing of filing was made shorter and the scope of items covered was made more comprehensive following implementation of the Sarbanes-Oxley Act of 2002.
Form D. Required filing made with the SEC under Regulation D describing a private placement whose issuer is claiming an exemption from registration pursuant to Regulation D.
Form S-1. Primary form of registration of securities under the Securities Act of 1933 for companies that do not qualify to report under Regulation S-B.
Form S-4. Form of registration of securities under the Securities Act of 1933 when securities are issued pursuant to combination transactions and upon other events.
Form S-8. Simplified form of registration of securities under the Securities Act of 1933, utilized if securities are issued pursuant to a stock option or other employee benefit plan, or issued to consultants or other advisers. Shell companies may not utilize Form S-8.
Form SB-2. Primary form of registration of securities under the Securities Act of 1933 for companies that qualify to report under Regulation S-B.
Form SB-2 resale registration. Registration of previously issued securities on behalf of owners wishing to be permitted to publicly resell the securities. Used by companies that qualify to report under Regulation S-B.
forward stock split. A process by which each share of a company's stock of is multiplied and increased on a pro rata basis among all shareholders. For example, a company with 100 shares outstanding that completes a two-for-one forward stock split would have 200 shares outstanding following the forward stock split.
founder stock. Shares of a company issued to its original management and investors who started the business.
franchise tax. Annual levy payable to a state in which a corporation is incorporated or doing business.
free-trading shares. Shares of stock in a corporation that have been registered with the SEC for sale or resale or which are able to be traded pursuant to an exemption from registration.
fully reporting company. See reporting company.
general solicitation. Seeking interest from the public at large for an offering either through advertising or some type of mass communication. For a private placement to qualify for the exemption from registration under Regulation D, no general solicitation may take place.
good standing. Status of a corporation in a particular state as both existing (or qualified to do business as applicable) and up to date on paying franchise taxes and completing certain filings which the state may require. A corporation may not effect certain transactions without being in good standing.
go private. Seeking to stop being a reporting company through filing of Form 15, if available, or seeking effectiveness of a filing with the SEC called Schedule 13E-3, describing a plan for qualifying to file Form 15.
grandfathered shells. Shell companies and blank checks which were formed and taken public prior to the passage of Rule 419 were permitted to continue to exist without the restrictions of Rule 419.
hedge. To protect an investment by using certain financial, legal, or trading techniques which generally limit both the gain and potential loss of the investment.
information statement. Filing with the SEC in lieu of a proxy statement where shareholder approval is to be obtained on a matter but proxies are not being requested or solicited, because the requisite number of shareholders either has already approved the matter or is expected to approve the matter at a meeting.
initial public offering (IPO). The process of going public through an offering of securities by a corporation to the public and filing and seeking effectiveness of a registration statement under the Securities Act of 1933.
insider filings. Reports that are required to be filed with the SEC by officers, directors, and at least 5 percent shareholders of reporting companies. Such filings include information about securities holdings or changes in holdings.
insider trading. Technically includes all purchases and sales of shares of a company's stock by officers, directors, and affiliates, but more commonly is used to refer to illegal trading by these insiders or others based on possession of material nonpublic information.
intrastate exemption. Allows shares of a corporation located and incorporated in one state to offer securities within that state in a manner which is exempt from SEC registration. Such an offering may require state registration.
Investment Company Act of 1940. Federal statute passed to regulate mutual funds and other entities established to invest in securities. Most hedge funds operate pursuant to an exemption from regulation under this Act.
investor relations (IR). The process by which a company seeks to garner positive attention from broker-dealers and others in a position to influence investment in the company's public stock. Also includes day-to-day dealings with existing shareholders of a company.
IPO window. The period of time in which IPOs are popular with investors and available to private companies seeking to become public through an IPO. The IPO window is described as open during periods of popularity, and otherwise closed.
junior SPAC. Proposed type of SPAC raising a minimal amount of money to qualify for a Rule 419 exemption, and avoiding shareholder reconfirmation of investment, short time limit, and mandatory industry focus.
liquidity. The ability to easily sell or purchase a public company's securities. Also an often-cited benefit of being a public company.
listed stock. A company's stock which is tradable on a major market or exchange such as the New York Stock Exchange, American Stock Exchange, or Nasdaq.
manufactured shell. A shell company created from scratch for the purpose of being a shell company.
market capitalization. The perceived value of a public company calculated by multiplying a company's per-share trading price by the number of total shares of stock outstanding. Also referred to as market cap.
market maker. A broker-dealer that agrees to make a market in a Pink Sheet or Over-the-Counter Bulletin Board stock. Stocks may not trade on these markets without a market maker. A market maker is required to complete transactions from its own account if it is not able to find another party to complete a transaction.
market support. The extent to which brokerage firms, market makers, and their customers participate in the market for a company's stock following an IPO, reverse merger, or self-filing.
merger. A process by which two U.S. corporations combine, with one corporation continuing as the surviving entity and the other disappearing as the nonsurviving entity. Shares of stock of the nonsurviving entity typically are exchanged for shares of the surviving entity or a parent company of the surviving entity.
merger proxy. A complex filing with the SEC in which one party to a merger is a reporting company.
messy shell. A shell company with records that are difficult to obtain and transactions that are not easy to verify. As distinguished from a dirty shell, no unsavory activity is suspected.
Nasdaq. The National Association of Securities Dealers Automated Quotation System includes two trading markets, one known as the Nasdaq National Market and a lower-level market known as the Nasdaq SmallCap Market. Nasdaq also owns and operates the Over-the-Counter Bulletin Board, or OTCBB.
National Association of Securities Dealers (NASD). All broker-dealers must be members of the NASD, which regulates and oversees the operations of broker-dealers.
new listing application. Application made to a market or exchange seeking for the first time for a company's securities to be listed on that market or exchange. The application is typically subject to the market or exchange's new listing standards.
New York Stock Exchange. Considered the most prestigious U.S. stock exchange, with the most stringent listing and maintenance standards.
no-action letter. A publicly available letter from the staff of the SEC indicating that the staff will recommend no enforcement action against the addressee if it follows a certain course of action. Each letter declares it cannot be relied on by others, but most practitioners consider them as having quasiprecedential value.
nonaccredited investor. A purchaser of shares that does not meet the definition of accredited investor.
nonreporting company. A company that either is not subject to the SEC's reporting requirements under the Securities Exchange Act of 1934 or which is subject to the requirements but is not current in its required filings.
nontrading shell. A shell company whose shares do not trade or cannot trade until after a reverse merger.
offering. The process by which a company seeks buyers for its securities, or by which a holder of securities seeks buyers of those securities.
option. The right to purchase securities (typically common stock) of a company for a fixed period of time, generally for a predetermined price.
overhang. The existence of derivative securities such as preferred stock, warrants, or options which may be converted into or exercised for shares of common stock, thereby increasing the number of shares outstanding upon such conversion or exercise.
Over-the-Counter Bulletin Board (OTCBB). A trading market most commonly used following a reverse merger, as its listing and maintenance requirements are minimal, other than being a reporting company. Most OTCBB stocks are not heavily traded.
penny stock. In the Penny Stock Reform Act of 1990, it was defined as "any stock which is not selling on a major exchange and has a purchase price of less than $5 per share." Most post-reverse merger stocks are initially penny stocks when they begin trading.
penny stock market. Typically refers to the trading activity in lower-priced stocks on the Over-the-Counter Bulletin Board or Pink Sheets.
Penny Stock Reform Act of 1990 (PSRA). Following abusive practices in the penny stock market, Congress mandated more disclosure to purchasers of penny stocks and more information be gathered by broker-dealers from customers who are purchasing penny stocks. The PSRA also directed the SEC to pass a rule which ultimately became Rule 419.
piercing the corporate veil. The ability in a corporation to successfully sue shareholders for debts of the corporation if the corporation is effectively an alter ego of the shareholder.
Pink Sheets. A centralized quotation service that collects and publishes market maker quotes for Over-the-Counter securities. Unlike the OTCBB, issuers do not have to be fully reporting companies with the SEC for their shares to be quoted on the Pink Sheets.
pink sheet shell. A shell company whose shares trade on the Pink Sheets.
post-effective amendment. An SEC filing effecting changes or updates in a registration statement after it becomes effective. Rule 419 requires a post-effective amendment to disclose information about the company proposed to be merged into a shell.
post-money valuation. The value of a company immediately after it completes a financing. Generally calculated by adding the amount of financing to the pre-money valuation.
preferred stock. A class of securities in a corporation generally higher in the capitalization structure than common stock, often with special rights or privileges.
pre-money valuation. The value of a company immediately before it completes a financing.
primary registration. A registration statement filed on behalf of a company seeking for it to register its shares for a public offering.
private company. A company that has not conducted a public offering nor become a reporting company.
private equity. A somewhat amorphous term referring generally to a source of financing that involves a private placement.
private investment in public equity (PIPE). A private placement of equity or equity-linked securities effected for a public company, typically with immediate required registration of the equity sold to the investor.
private offering. Offering of securities by a company or a holder of securities that does not involve a public offering. Also referred to as a private placement.
private placement. See private offering.
private placement memorandum (PPM). A detailed offering document that describes a company's business strategy, financial performance, risk factors and the like, which is utilized in a private offering.
promoter. Entity or person that controls a shell and is actively seeking a private operating company with which to merge. A promoter can also be any investment bank or broker otherwise promoting a deal.
prospectus. Document used for public offering by issuer or shareholders including information required by SEC rules, in form and content approved by the SEC and contained in a larger filing known as a registration statement.
proxy statement. Mailing to shareholders of reporting company in form and content approved by the SEC in accordance with proxy rules. Required when a shareholder meeting is planned and management or another party is soliciting proxies from shareholders. The proxy, or individual designated by the shareholder, appears at the meeting on the shareholder's behalf and votes the shareholder's shares in a predesignated manner.
public company. A company that either has conducted and completed a public offering or has otherwise become a reporting company. May include either a company that has completed a public offering but is not a reporting company or a company whose shares do not trade.
Public Company Accounting Oversight Board (PCAOB). Established by the Sarbanes-Oxley Act of 2002, the body that oversees accounting and auditing of reporting companies. An auditor must be registered with the PCAOB to perform an audit of a reporting company. PCAOB establishes rules for auditors, audits all accounting firms which audit more than one hundred reporting companies, and randomly audits all others.
public float. See float.
public offering. The process by which a company seeks to offer and sell its securities to the public, as opposed to a limited distribution of securities as in a private placement. Also refers to the process by which a shareholder may seek to offer shares of a company other than in a private placement. Public offerings typically require registration with the SEC.
public relations (PR). The process by which a company seeks to obtain broad awareness and knowledge of its product or service offerings or of other news concerning the company, often with the assistance of a public relations firm or similar expert and through the issuance of announcements or press releases.
public shell company. See shell company.
public venture capital. Often used to refer to a private placement accompanying a reverse merger. Relates to the fact that the investment risk is often similar to a venture capital investment, except that the investment is into a public company.
pump and dump. Illegal practice by unsavory investors or broker-dealers in which misleading or false information is provided to the marketplace, causing a stock's price to rise, upon which questionable players sell their stock. After this, true information becomes available and the stock price generally returns to its prior lower level.
qualified institutional buyer (QIB). An entity, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity.
reconfirmation prospectus. Under Rule 419, prior to completing a reverse merger, the shell must prepare and have approved by the SEC a prospectus containing detailed information concerning the private company merging into the shell. This prospectus is delivered to purchasers in the shell's IPO, 80 percent of whom must reconfirm their investment after reviewing the prospectus before the merger can be completed. Those who do not reconfirm receive their investment back, less expenses.
registered broker-dealer. See broker-dealer.
registered stock. Shares of a company's capital stock that have been registered with the SEC either for sale by the company to the public or for resale by a shareholder to the public.
registration. The process of obtaining approval from the SEC for a public offering of securities of a company or shareholder by following the SEC's rules for required disclosures in connection with registering individual shares either for sale by a company to the public or for resale by a shareholder to the public.
registration statement. A filing required by the SEC in form and content approved by the SEC in order to effect the registration of shares.
Regulation A. This SEC regulation permits offerings of up to $5 million to an unlimited number of investors, whether or not accredited. An offering circular is prepared and approved by the SEC, but the form is more streamlined than a full registration statement and does not require audited financial statements.
Regulation D (Reg D). Passed in 1982, this SEC regulation offers a safe harbor ensuring that an offering is a private placement and exempt from registration. The most common exemption used is contained in Rule 506, which permits an unlimited amount of money to be raised to all accredited investors and up to thirty-five unaccredited investors. No specific information delivery is required to accredited investors, but nonaccredited investors must receive all information that would be in a public offering prospectus, unless the information is not material.
Regulation S (Reg S). This SEC regulation provides for an exemption from registration for securities offerings by U.S. companies if they are completely or partially from foreigners or by a foreign company, if raising money completely overseas where some directed selling efforts take place in the United States. No specific information delivery or accredited investor status applies.
Regulation S-B. This SEC regulation outlines disclosure requirements for smaller companies in the small business filing system, generally permitting less information in its offerings and periodic reports. A company fits the S-B system if it has revenues of less than $25 million, is a U.S. or Canadian issuer, is not an investment company or asset-backed issuer, and its parent (if a subsidiary) is also a small business issuer. Also, if the company has a public float (held by nonaffiliates) of $25 million or more, it would not fit into the S-B filing system. The regulation may be amended or even overhauled by SEC Advisory Committee on Smaller Public Companies.
Regulation S-K. This SEC regulation, which predates Regulation S-B, outlines disclosure requirements for companies that do not fit into the Regulation S-B system.
Regulation S-T. This SEC regulation provides requirements for SEC filings made electronically through the EDGAR system.
reporting company. A company which is obligated to file periodic and current reports with the SEC as a result of a recent public offering or voluntary registration under the Securities Exchange Act of 1934.
representations. Statements of fact concerning a company, generally provided in an agreement to reassure third parties and allow them to rely on the statement. For example, "The Company has 10 million shares of common stock outstanding."
resale registration. Effecting a registration of shares held by individual shareholders to permit their resale in the public market. Technically the registration is made on behalf of the selling shareholders, but typically the company prepares and handles the filing.
restricted stock. Shares of capital stock of a company which are not registered or which are not able to be sold in the public market through an exemption from registration.
reverse merger. A method by which a private operating company arranges for its stock to be publicly traded following a merger or similar transaction with a publicly held shell company, pursuant to which the equity owners of the private company typically take control of the former shell company.
reverse stock split. A pro rata reduction in the number of shares of capital stock of a company that are outstanding. Typically requires approval of a majority of shareholders. Often used to increase per-share price, or to make more authorized shares available in order to complete a reverse merger.
reverse takeover (RTO). Another term sometimes used for reverse merger.
reverse triangular merger. A reverse merger in which the public shell company creates a wholly owned subsidiary, and which subsidiary merges with and into the private company seeking to merge. As a result, the private company becomes a wholly owned subsidiary of the public shell company. Typically used to avoid shareholder approval at the level of the shell company and to allow the operating business to maintain its corporate existence.
round lot shareholders. Equity owners of a public company that hold at least 100 shares.
Rule 10b-5. This SEC rule, under the Securities Act of 1933, forbids intentionally and materially misleading a third party in connection with the purchase or sale of a security.
Rule 144. This SEC rule, under the Securities Act of 1933, provides a popular exemption from registration, allowing otherwise restricted securities to be sold in the public market if they have been held for a sufficient period of time, typically at least one year and in some cases two years.
Rule 144A. This SEC rule permits qualified institutional buyers, or QIBs, to trade restricted securities between and among themselves and allows for broader exemptions from registration for those offering securities to QIBs.
Rule 419. This SEC rule, passed in 1992, requires significant safeguards in connection with an IPO or other registration under the Securities Act of 1933 of shares of a blank check. These safeguards include requiring almost all funds raised and shares issued to be placed in escrow pending a merger, an eighteen-month time limit to complete a merger, investor reconfirmation of their investment prior to a merger, and other requirements. An IPO is exempt from this rule if it raises more than $5 million, as a result of which all SPACs are exempt from Rule 419.
Rule 419 shell. A shell company or blank check created through an IPO conducted under Rule 419.
Rule 504. This SEC rule, part of Regulation D, permits up to $1 million to be raised by a private company from an unlimited number of accredited and nonaccredited investors, with no information delivery requirements and the ability of the shares to trade unrestricted following such offering. Most states do not permit Rule 504 offerings.
SAFE (China's State Administration of Foreign Exchange). Chinese regulatory agency that oversees foreign exchange and briefly sought to limit or restrict reverse mergers involving Chinese companies.
Sarbanes-Oxley Act of 2002 (SOX). The largest and broadest change in U.S. securities laws since 1934, SOX shortened reporting times for most companies' periodic reports and insider reports, mandated establishment and maintenance of internal financial controls, added corporate governance requirements, in particular with respect to oversight of a company's audit, eliminated all extension of credit to executives, and required top executives to certify as to the material correctness of their financial statements.
Schedule 13D. SEC filing required to be made by any holder of at least 5 percent of a reporting company's stock if it is part of management or if the holder may seek to effect or influence management.
Schedule 13G. SEC filing required to be made by any holder of at least 5 percent of a reporting company's stock if it is not part of management and if the holder does not seek to effect or influence management, or meets other criteria.
Schedule 14F. SEC filing required to be made and mailed to shareholders if, pursuant to a transaction involving at least 5 percent of a reporting company's stock, there is an arrangement or understanding to effect a change in a majority of the board.
scrubbing a shell. Typically refers to the process of completing a thorough due diligence review of a shell and solving problems that arise during that process.
SEC Advisory Committee on Smaller Public Companies. Established in 2005, the committee is charged with reviewing all aspects of SEC regulation of companies with revenues of less than $700 million. Its report was completed in April 2006.
SEC comments. Most registration statements are reviewed by the SEC, which provides comments to the issuer recommending changes or additional disclosure in the registration statement.
SEC Division of Corporation Finance. The division of the SEC charged with overseeing reporting companies and offerings of securities.
SEC examiner. An individual, typically within the SEC Division of Corporation Finance, who takes primary responsibility for reviewing and commenting on an SEC filing.
SEC filing. Any document formally submitted to the SEC under its rules.
SEC Office of Small Business Policy. Part of the SEC Division of Corporation Finance, which develops and assists in implementation of the SEC's policies that relate to smaller businesses.
SEC Reverse Merger Rulemaking in 2005. In June 2005, the SEC passed a new set of rules directly effecting reverse mergers, which became fully effective in November 2005. In addition to requiring substantial disclosure about the fully merged company within four business days after completing a reverse merger with a shell company, the rule requires every single reporting company to declare whether it meets a newly created definition of shell company. The rule also eliminated the use of Form S-8 by shell companies.
secondary offering. A public offering by a company's shareholders.
Section 404 of the Sarbanes-Oxley Act of 2002. The section of SOX mandating the establishment and maintenance of internal financial controls in certain reporting companies.
Securities Act of 1933. The first law regulating the securities markets passed during the Great Depression and regulating the offering of securities.
Securities and Exchange Commission (SEC). See U.S. Securities and Exchange Commission (SEC).
Securities Exchange Act of 1934. The follow-up to the Securities Act of 1933 established the SEC and set up the integrated disclosure system, along with regulation of broker-dealers, tender offers, and proxy solicitation.
self-filing. The process by which a private company may seek a public trading market for its securities without an IPO or a reverse merger, by completing its own filings with the SEC either to resell securities held by shareholders or to voluntarily become a reporting company.
share exchange. One method of completing a reverse merger by simply exchanging shares of the public shell company for shares of the private company seeking to merge.
shareholder approval. The process by which consent of shareholders is required under applicable state corporate law in the state where a corporation is incorporated.
shareholder base. The number of holders of shares of stock of a corporation.
shareholder rights certificate. A certificate sometimes used to represent the right to receive shares of stock of a company following a reverse stock split, increase in authorized shares, or other recapitalization.
shareholders of record. Holders of capital stock of a company holding physical stock certificates issued by the company's transfer agent. Does not include holders of capital stock who possess only electronic representation of shares through the Depository Trust Corporation.
shares authorized. The number of shares of a class of stock a corporation is permitted to issue pursuant to the corporation's certificate of incorporation.
shares issued. The number of shares of a class of stock a corporation has issued to holders, including shares which may have been redeemed or repurchased by or forfeited to the corporation and not cancelled and are no longer outstanding.
shares outstanding. The number of shares of a class of stock a corporation has issued to holders, excluding shares that may have been redeemed or repurchased by or forfeited to the corporation.
shell broker. An individual or entity who assists parties seeking to purchase or merge with a shell company by identifying and negotiating transactions with shell managers.
shell company. A company with no or nominal assets (other than cash) and no or nominal operations. Also referred to as a public shell company.
shell merger. A reverse merger or similar transaction effected with a shell company.
shell promoter. See promoter.
short selling. The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.
short swing profit rule. Under Section 16 of the Securities Exchange Act of 1934, this SEC rule states that an officer, director, or 10 percent shareholder of a reporting company may not purchase and then sell, or sell and then purchase, any shares of the company's stock within a six-month period and retain profits from the transaction.
specified purpose acquisition company (SPAC). A blank check that completes an IPO pursuant to an exemption from Rule 419 for companies raising more than $5 million. SPACs generally have an industry focus with a related management team, and adopt several of the Rule 419 restrictions to assist in attracting investors.
stock. A form of equity ownership in a corporation.
stock option. The right to purchase stock for a specified period of time and typically for a specified price.
stock split. A pro rata increase or decrease in the number of shares outstanding, typically requiring shareholder approval.
street name. Common term for holding shares electronically through the Depository Trust Corporation rather than through a physical stock certificate.
subsidiary. An entity that is owned more than 50 percent by another entity.
super Form 8-K. Term used to describe the current report required to be filed following a reverse merger with a shell company and including the same information that would be included in a Form 10-SB for the merged company. Also called a super 8-K.
super 8-K. See super Form 8-K.
thin trading. Common criticism of post-reverse-merged companies or trading shells, which is that only limited stock trading exists.
trading shell. A shell company whose common stock may be publicly bought and sold on an established market or exchange.
transfer agent. Transfer agents keep a company's stock records, issue stock certificates when appropriate, help conduct a company's annual meeting by providing inspection services and current lists of shareholders, and help with stock splits, stock dividends, and similar changes.
unaccredited investor. See nonaccredited investor.
unclean shell. Broad term meant to encompass either a dirty shell or a messy shell.
underwriter. Broker-dealer that serves to complete an IPO of a company by purchasing shares from the company at a discount and then reselling them to the broker-dealer's customers.
unregistered broker. Individual or entity performing functions normally required of a registered broker-dealer but which is not registered with the SEC or NASD.
unregistered stock. See restricted stock.
U.S. Securities and Exchange Commission (SEC). The administrative agency established by the Securities Exchange Act of 1934, which implements securities laws and establishes and enforces rules and regulations under those laws.
valuation. Process of determining the worth of a company or worth of a share of stock.
variable interest entities (VIEs). Entities that, under IRS regulations, must consolidate their financial statements as a result of a close relationship between the entities.
venture capital. Financing source for early-stage and emerging, typically private companies.
voluntarily reporting company. Company which is not required to provide reports like a reporting company but chooses to do so anyway.
warrant. A security that entitles the holder to purchase another security (typically common stock) at a specified price during a specified time period.
warranties. A promise that something is in a certain state or condition. For example, "All our inventory is in saleable condition," or, "We have complied with all applicable laws concerning our pension plan." They are typically provided along with representations in reverse merger agreements.
wholly foreign-owned enterprise (WFOE). Entity permitted by Chinese regulations to be owned by foreign entities or nationals.
wholly owned subsidiary. A subsidiary all of whose equity ownership is held by one entity.
Worm/Wulff Letters. Series of letters between the SEC and Nasdaq providing that affiliates or promoters of blank check companies can never sell their shares either publicly or privately under Rule 144 or Section 4(1) of the Securities Act without those shares being fully registered first.
Wulff/Worm Letters. See Worm/Wulff Letters.
http://www.dealflowmedia.com/publications/reversemergers-glossary.html
These terms and definitions are extracted from the book Reverse Mergers: Taking a Company Public Without an IPO and appear here courtesy of Bloomberg Press.
4(2) analysis. The method by which one determines whether a private offering is exempt from registration with the SEC because the issuer is involved with a nonpublic offering.
accredited investor. As defined in Rule 501 under Regulation D, refers to the type of investor that is not required to receive detailed offering materials in a Regulation D offering. Generally means an individual with $200,000 in recent and expected annual income (or $300,000 when combined with one's spouse) or $1 million in net worth, a broker-dealer, bank or institution, any entity not formed for the purpose of the investment in question with at least $5 million in assets, or an entity all of whose equity owners are accredited.
Advisory Committee on Smaller Public Companies. Group established by the SEC in 2005 to review all aspects of SEC regulation of public companies with less than a $700 million market capitalization. The final report from the committee was issued in April 2006.
affiliate. A person or entity which controls another, is controlled by another, or is under common control with another. In a corporation, affiliate status is presumed if one is an officer or director or control shareholder (generally holding at least 20 percent of the outstanding capital stock).
aftermarket. Trading activity of a stock immediately following the event by which an operating business's stock becomes publicly tradable. More commonly referred to in connection with an IPO, but also applies following a reverse merger.
aftermarket support. The extent to which brokerage firms and market makers and their customers participate in the aftermarket following a reverse merger or self-filing.
alternative investment market (AIM). A stock exchange based in London, England which lists stocks of companies that may not qualify for the London Stock Exchange or similar broader exchanges.
alternative public offering (APO). Somewhat misleading term used to refer to the variety of methods of going public other than an IPO. The term generally describes reverse mergers, self-filings, Rule 504 offerings, and Regulation A offerings; however, a number of these methods do not include public offerings, which is why the term is somewhat misleading.
American Stock Exchange. A major U.S. exchange where a public company's shares can trade. Listing and maintenance requirements are more stringent than on the Over-the-Counter Bulletin Board, but it is generally considered easier to list on the American Stock Exchange than on the Nasdaq or the New York Stock Exchange.
asset acquisition. One method used to complete the combination of two entities. Rather than a direct merger or share exchange, one entity, in the case of a reverse merger typically the public shell, acquires the assets of an operating business.
audit. Detailed review of a company's financial statements and performance, where thorough checks of inventory, expenses, revenues, and the like are performed by an independent certified public accounting firm. SEC rules under the Sarbanes-Oxley Act of 2002 require an audit of a public company to be performed by an accounting firm that is registered with the Public Company Accounting Oversight Board.
audited financials. The state of a company's financial statements after being approved by an auditor.
auditor. The accounting firm performing a financial audit.
backdoor registration. A method by which a company's shares can become publicly tradable through a merger directly with a public shell, after which the private operating company survives the merger and succeeds to the public status of the shell.
bankrupt shell. A public shell that has been created either through issuance of shares following a bankruptcy (these shares are publicly tradable under a provision of the Bankruptcy Code) or a public operating business that was sold or liquidated through a bankruptcy, leaving behind a public shell with virtually no liabilities.
beneficial owner. Either the record owner of securities or someone deemed to be the owner of securities under applicable SEC rules. Examples of beneficial ownership include the presumption that one owns shares which underlie currently exercisable options or warrants, or shares owned by one's spouse.
blank check. As defined in SEC Rule 419, a development stage company with no business plan or whose business plan is to merge with or acquire an operating business. Also referred to as a blank check company.
blank check company. See blank check.
blank check preferred stock. In a corporation's certificate of incorporation, it may authorize the issuance of preferred stock. If that authorization includes granting the board of directors the power to determine the rights, powers, and preferences of the preferred stock without further shareholder approval, it is known as blank check preferred stock.
blind pool. Term used by some in the industry to refer to a blank check which is raising or which has raised money.
blue sky laws. Securities laws and regulations in each of the fifty states, regulating the offering of securities in that state. According to www.investopedia.com, the term is said to have originated in the early 1900s when a Supreme Court justice declared his desire to protect investors from speculative ventures that had "as much value as a patch of blue sky."
board. See board of directors.
board of directors. Governing body of a U.S. corporation. Shareholders generally elect members of the board of directors, which is granted broad powers to elect officers such as the president and secretary and oversee a corporation's business. Also referred to simply as a board.
broker-dealer. A firm engaged in the business of effecting securities and other transactions for the accounts of others. They are required to be registered with the SEC and the NASD.
bulletin board shell. A blank check or shell company whose securities trade on the Over-the-Counter Bulletin Board.
bylaws. Set of rules governing many aspects of a corporation's business, including the process of electing officers and directors, calling and conducting meetings, and defining protocols related to shareholders and stock certificates.
cash-and-carry shell. A shell company whose owners wish to sell most or all of the shell's ownership for cash, rather than participate as equity holders in a merger with an operating business.
cashless exercise. The right to exercise an option or warrant without paying the cash exercise price, by returning other options or warrants for their value, which is determined by subtracting the exercise price from the stock's trading price. As an example, if one holds one hundred options exercisable at $1 each, and the stock's trading price is $2, one could return 50 options as the exercise price for the other 50.
certificate of incorporation. The filing with a U.S. state's government (typically the Department of State) to create a corporation. Some states use the term articles of incorporation, and often the term charter refers to this document. Typically includes the number and type of shares of stock which are authorized, the corporation's name, and limitation of liability of corporate directors. Also referred to as a corporate charter.
change of control. A transaction pursuant to which a company's shareholdings, board of directors, and/or officers undergo a majority change. This can occur as a result of the sale of a company, the accumulation of stock by an unfriendly acquirer, or a shake-up resulting from a shareholder vote expressing dissatisfaction with a board or management's performance.
clean shell. A shell company which has no liabilities or other negative attributes as perceived by an operating business seeking to merge with it.
contemporaneous financing. A common technique in reverse mergers where an operating business combining with a shell company raises money at the same time as the completion of the merger, typically through a PIPE or other private placement.
controlling shareholders. Those who have the ability, through their ownership of shares of stock of a corporation, to approve matters required to be approved by shareholders, or to elect the board of directors.
convertible debt. Indebtedness of a corporation, the holder of which has the right to exchange or convert monies owed into stock at a negotiated price.
convertible preferred stock. Preferred stock of a corporation, the holder of which has the right to exchange or convert shares into shares of the corporation's common stock at a negotiated conversion price.
corporate charter. See certificate of incorporation.
corporate director. A member of a corporation's board of directors.
corporate officer. An individual elected by the board of directors to be an officer of a corporation. Most states require every corporation to have a president and secretary, but additional officers may be appointed and may include treasurer, vice president, chief executive officer, and chief financial officer. Individuals with titles resembling those of corporate officers are not corporate officers unless elected by the board of directors. Officers have certain fiduciary duties to the board and the corporation's shareholders.
current report. A filing with the SEC, most commonly on Form 8-K, describing an event or transaction that has taken place between the company's filings of periodic reports.
CUSIP number. An identification code issued by the CUSIP bureau identifying a class of stock. Publicly trading securities are required to have a CUSIP number.
delist. To remove a company's securities from a particular market or exchange so that they cannot trade on that market or exchange. Sometimes, a company voluntarily delists, in other cases delisting is involuntary for failure to meet a market or exchange's listing standards.
demand registration rights. The right for a holder of a company's securities to require the company, typically at the company's expense, to file and seek effectiveness of a resale registration statement including those securities.
Depository Trust Company (DTC). The custodian of records reflecting electronic representation of ownership of publicly tradable securities. DTC also serves as record owner on a company's records of all shares held electronically where a physical stock certificate has not been issued.
deregister. Commonly used term to refer to the process by which a reporting company voluntarily seeks to terminate its status as a reporting company, typically through filing of SEC Form 15, which is generally available only if a company has fewer than 300 shareholders of record. The SEC also has the power to effect an involuntary deregistration for failure to follow their regulations.
dilution. The reduction in either percentage ownership or value of one's ownership interest resulting from additional issuances of securities of a company.
dirty shell. A shell company in which it appears shady players have been involved and undertaken questionable transactions or tactics that have the effect of reducing the shell's desirability to a merger partner.
due diligence. The process of reviewing a company's operating history, assets, liabilities, risks, uncertainties, and management in anticipation of entering into a transaction with that company.
EDGAR. The SEC's Electronic Data Gathering, Analysis, and Retrieval system of filing virtually all SEC filings. EDGAR has been fully effective since 1996.
equity. Ownership of a business, whether through shares of stock of a corporation, membership interests in a limited liability company, partnership interests in a partnership, or securities granting the right to acquire any such interests.
escrow. The process by which a third party, at the request of parties to a transaction, holds money or other property as the agent of the parties, with such money or property being released pursuant to the instructions of the parties.
exemptions from registration. The opportunity for securities of a corporation to be sold publicly without being registered with the SEC. The most common exemption is Rule 144.
exit strategy. Term used by venture capitalists and private equity investors referring to the method by which they might liquidate an investment in a company.
fairness opinion. Advice from an independent third party that a particular transaction is fair from a financial point of view. Typically, this advice provides a board of directors with greater comfort as to the value of a transaction, and is particularly helpful when members of the board or shareholders have a conflict of interest in the transaction.
firm commitment underwriting. Public offering of securities in which the underwriter agrees to purchase all securities offered by the company. It then resells the securities to its customers after having purchased the shares at a discount from the company. Distinguished from best efforts underwriting, whereby the underwriter simply promises to use its best efforts to resell the shares.
float. Shares of a publicly held company that are tradable by the public. Most definitions of float exclude shares held by officers, directors, and other affiliates. Also referred to as public float.
follow-on offering. Sale of a company's securities to the public after the company is already public by way of an event such as either an IPO or reverse merger.
Footnote 32. Note in the SEC's June 2005 reverse merger rulemaking which acknowledges a questionable tactic whereby individuals take supposedly operating companies public with the intention of shutting down or spinning off the business upon a reverse merger. This allows the promoter to avoid Rule 419 restrictions. The SEC declares these entities shell companies.
Footnote 32 shell. Shells created when individuals take supposedly operating companies public with the intention of shutting down or spinning off the company upon a reverse merger. This allows the promoter to avoid Rule 419 restrictions. The SEC declared these entities as shell companies in its June 2005 rulemaking.
Form 10-K. Annual report filed with the SEC by a company that does not qualify to report under Regulation S-B. Includes detailed company information and three years of audited financials.
Form 10-KSB. Annual report filed with the SEC by a company that qualifies to report under Regulation S-B. Includes detailed company information and two years of audited financials.
Form 10-SB. Registration statement under the Securities Exchange Act of 1934 which registers a class of securities with the SEC but does not register any individual shares for public sale. After effectiveness of the filing, the company is an SEC reporting company.
Form 10-SB registration. The process of filing and seeking effectiveness of Form 10-SB. Filing is automatically effective sixty days after filing. If SEC comments are outstanding after sixty days, they are dealt with through a post-effective amendment.
Form 10-SB shell. Shell company created by filing Form 10-SB on behalf of previously private shell. Creates a clean but nontrading shell.
Form 15. Filing with the SEC undertaken to deregister.
Form 211. Filing with the NASD undertaken by a market maker to commence trading of a company's securities on the Pink Sheets or Over-the-Counter Bulletin Board.
Form 8-A. Simple SEC filing under the Securities Exchange Act of 1934 after which a company is an SEC reporting company, in lieu of using the more complex Form 10-SB. Can only be used by the end of the first fiscal year after a company completes a registration under the Securities Act of 1933, or under certain other limited circumstances.
Form 8-K. Current report required to be filed by reporting companies between periodic reports when certain material events occur, including a reverse merger. The timing of filing was made shorter and the scope of items covered was made more comprehensive following implementation of the Sarbanes-Oxley Act of 2002.
Form D. Required filing made with the SEC under Regulation D describing a private placement whose issuer is claiming an exemption from registration pursuant to Regulation D.
Form S-1. Primary form of registration of securities under the Securities Act of 1933 for companies that do not qualify to report under Regulation S-B.
Form S-4. Form of registration of securities under the Securities Act of 1933 when securities are issued pursuant to combination transactions and upon other events.
Form S-8. Simplified form of registration of securities under the Securities Act of 1933, utilized if securities are issued pursuant to a stock option or other employee benefit plan, or issued to consultants or other advisers. Shell companies may not utilize Form S-8.
Form SB-2. Primary form of registration of securities under the Securities Act of 1933 for companies that qualify to report under Regulation S-B.
Form SB-2 resale registration. Registration of previously issued securities on behalf of owners wishing to be permitted to publicly resell the securities. Used by companies that qualify to report under Regulation S-B.
forward stock split. A process by which each share of a company's stock of is multiplied and increased on a pro rata basis among all shareholders. For example, a company with 100 shares outstanding that completes a two-for-one forward stock split would have 200 shares outstanding following the forward stock split.
founder stock. Shares of a company issued to its original management and investors who started the business.
franchise tax. Annual levy payable to a state in which a corporation is incorporated or doing business.
free-trading shares. Shares of stock in a corporation that have been registered with the SEC for sale or resale or which are able to be traded pursuant to an exemption from registration.
fully reporting company. See reporting company.
general solicitation. Seeking interest from the public at large for an offering either through advertising or some type of mass communication. For a private placement to qualify for the exemption from registration under Regulation D, no general solicitation may take place.
good standing. Status of a corporation in a particular state as both existing (or qualified to do business as applicable) and up to date on paying franchise taxes and completing certain filings which the state may require. A corporation may not effect certain transactions without being in good standing.
go private. Seeking to stop being a reporting company through filing of Form 15, if available, or seeking effectiveness of a filing with the SEC called Schedule 13E-3, describing a plan for qualifying to file Form 15.
grandfathered shells. Shell companies and blank checks which were formed and taken public prior to the passage of Rule 419 were permitted to continue to exist without the restrictions of Rule 419.
hedge. To protect an investment by using certain financial, legal, or trading techniques which generally limit both the gain and potential loss of the investment.
information statement. Filing with the SEC in lieu of a proxy statement where shareholder approval is to be obtained on a matter but proxies are not being requested or solicited, because the requisite number of shareholders either has already approved the matter or is expected to approve the matter at a meeting.
initial public offering (IPO). The process of going public through an offering of securities by a corporation to the public and filing and seeking effectiveness of a registration statement under the Securities Act of 1933.
insider filings. Reports that are required to be filed with the SEC by officers, directors, and at least 5 percent shareholders of reporting companies. Such filings include information about securities holdings or changes in holdings.
insider trading. Technically includes all purchases and sales of shares of a company's stock by officers, directors, and affiliates, but more commonly is used to refer to illegal trading by these insiders or others based on possession of material nonpublic information.
intrastate exemption. Allows shares of a corporation located and incorporated in one state to offer securities within that state in a manner which is exempt from SEC registration. Such an offering may require state registration.
Investment Company Act of 1940. Federal statute passed to regulate mutual funds and other entities established to invest in securities. Most hedge funds operate pursuant to an exemption from regulation under this Act.
investor relations (IR). The process by which a company seeks to garner positive attention from broker-dealers and others in a position to influence investment in the company's public stock. Also includes day-to-day dealings with existing shareholders of a company.
IPO window. The period of time in which IPOs are popular with investors and available to private companies seeking to become public through an IPO. The IPO window is described as open during periods of popularity, and otherwise closed.
junior SPAC. Proposed type of SPAC raising a minimal amount of money to qualify for a Rule 419 exemption, and avoiding shareholder reconfirmation of investment, short time limit, and mandatory industry focus.
liquidity. The ability to easily sell or purchase a public company's securities. Also an often-cited benefit of being a public company.
listed stock. A company's stock which is tradable on a major market or exchange such as the New York Stock Exchange, American Stock Exchange, or Nasdaq.
manufactured shell. A shell company created from scratch for the purpose of being a shell company.
market capitalization. The perceived value of a public company calculated by multiplying a company's per-share trading price by the number of total shares of stock outstanding. Also referred to as market cap.
market maker. A broker-dealer that agrees to make a market in a Pink Sheet or Over-the-Counter Bulletin Board stock. Stocks may not trade on these markets without a market maker. A market maker is required to complete transactions from its own account if it is not able to find another party to complete a transaction.
market support. The extent to which brokerage firms, market makers, and their customers participate in the market for a company's stock following an IPO, reverse merger, or self-filing.
merger. A process by which two U.S. corporations combine, with one corporation continuing as the surviving entity and the other disappearing as the nonsurviving entity. Shares of stock of the nonsurviving entity typically are exchanged for shares of the surviving entity or a parent company of the surviving entity.
merger proxy. A complex filing with the SEC in which one party to a merger is a reporting company.
messy shell. A shell company with records that are difficult to obtain and transactions that are not easy to verify. As distinguished from a dirty shell, no unsavory activity is suspected.
Nasdaq. The National Association of Securities Dealers Automated Quotation System includes two trading markets, one known as the Nasdaq National Market and a lower-level market known as the Nasdaq SmallCap Market. Nasdaq also owns and operates the Over-the-Counter Bulletin Board, or OTCBB.
National Association of Securities Dealers (NASD). All broker-dealers must be members of the NASD, which regulates and oversees the operations of broker-dealers.
new listing application. Application made to a market or exchange seeking for the first time for a company's securities to be listed on that market or exchange. The application is typically subject to the market or exchange's new listing standards.
New York Stock Exchange. Considered the most prestigious U.S. stock exchange, with the most stringent listing and maintenance standards.
no-action letter. A publicly available letter from the staff of the SEC indicating that the staff will recommend no enforcement action against the addressee if it follows a certain course of action. Each letter declares it cannot be relied on by others, but most practitioners consider them as having quasiprecedential value.
nonaccredited investor. A purchaser of shares that does not meet the definition of accredited investor.
nonreporting company. A company that either is not subject to the SEC's reporting requirements under the Securities Exchange Act of 1934 or which is subject to the requirements but is not current in its required filings.
nontrading shell. A shell company whose shares do not trade or cannot trade until after a reverse merger.
offering. The process by which a company seeks buyers for its securities, or by which a holder of securities seeks buyers of those securities.
option. The right to purchase securities (typically common stock) of a company for a fixed period of time, generally for a predetermined price.
overhang. The existence of derivative securities such as preferred stock, warrants, or options which may be converted into or exercised for shares of common stock, thereby increasing the number of shares outstanding upon such conversion or exercise.
Over-the-Counter Bulletin Board (OTCBB). A trading market most commonly used following a reverse merger, as its listing and maintenance requirements are minimal, other than being a reporting company. Most OTCBB stocks are not heavily traded.
penny stock. In the Penny Stock Reform Act of 1990, it was defined as "any stock which is not selling on a major exchange and has a purchase price of less than $5 per share." Most post-reverse merger stocks are initially penny stocks when they begin trading.
penny stock market. Typically refers to the trading activity in lower-priced stocks on the Over-the-Counter Bulletin Board or Pink Sheets.
Penny Stock Reform Act of 1990 (PSRA). Following abusive practices in the penny stock market, Congress mandated more disclosure to purchasers of penny stocks and more information be gathered by broker-dealers from customers who are purchasing penny stocks. The PSRA also directed the SEC to pass a rule which ultimately became Rule 419.
piercing the corporate veil. The ability in a corporation to successfully sue shareholders for debts of the corporation if the corporation is effectively an alter ego of the shareholder.
Pink Sheets. A centralized quotation service that collects and publishes market maker quotes for Over-the-Counter securities. Unlike the OTCBB, issuers do not have to be fully reporting companies with the SEC for their shares to be quoted on the Pink Sheets.
pink sheet shell. A shell company whose shares trade on the Pink Sheets.
post-effective amendment. An SEC filing effecting changes or updates in a registration statement after it becomes effective. Rule 419 requires a post-effective amendment to disclose information about the company proposed to be merged into a shell.
post-money valuation. The value of a company immediately after it completes a financing. Generally calculated by adding the amount of financing to the pre-money valuation.
preferred stock. A class of securities in a corporation generally higher in the capitalization structure than common stock, often with special rights or privileges.
pre-money valuation. The value of a company immediately before it completes a financing.
primary registration. A registration statement filed on behalf of a company seeking for it to register its shares for a public offering.
private company. A company that has not conducted a public offering nor become a reporting company.
private equity. A somewhat amorphous term referring generally to a source of financing that involves a private placement.
private investment in public equity (PIPE). A private placement of equity or equity-linked securities effected for a public company, typically with immediate required registration of the equity sold to the investor.
private offering. Offering of securities by a company or a holder of securities that does not involve a public offering. Also referred to as a private placement.
private placement. See private offering.
private placement memorandum (PPM). A detailed offering document that describes a company's business strategy, financial performance, risk factors and the like, which is utilized in a private offering.
promoter. Entity or person that controls a shell and is actively seeking a private operating company with which to merge. A promoter can also be any investment bank or broker otherwise promoting a deal.
prospectus. Document used for public offering by issuer or shareholders including information required by SEC rules, in form and content approved by the SEC and contained in a larger filing known as a registration statement.
proxy statement. Mailing to shareholders of reporting company in form and content approved by the SEC in accordance with proxy rules. Required when a shareholder meeting is planned and management or another party is soliciting proxies from shareholders. The proxy, or individual designated by the shareholder, appears at the meeting on the shareholder's behalf and votes the shareholder's shares in a predesignated manner.
public company. A company that either has conducted and completed a public offering or has otherwise become a reporting company. May include either a company that has completed a public offering but is not a reporting company or a company whose shares do not trade.
Public Company Accounting Oversight Board (PCAOB). Established by the Sarbanes-Oxley Act of 2002, the body that oversees accounting and auditing of reporting companies. An auditor must be registered with the PCAOB to perform an audit of a reporting company. PCAOB establishes rules for auditors, audits all accounting firms which audit more than one hundred reporting companies, and randomly audits all others.
public float. See float.
public offering. The process by which a company seeks to offer and sell its securities to the public, as opposed to a limited distribution of securities as in a private placement. Also refers to the process by which a shareholder may seek to offer shares of a company other than in a private placement. Public offerings typically require registration with the SEC.
public relations (PR). The process by which a company seeks to obtain broad awareness and knowledge of its product or service offerings or of other news concerning the company, often with the assistance of a public relations firm or similar expert and through the issuance of announcements or press releases.
public shell company. See shell company.
public venture capital. Often used to refer to a private placement accompanying a reverse merger. Relates to the fact that the investment risk is often similar to a venture capital investment, except that the investment is into a public company.
pump and dump. Illegal practice by unsavory investors or broker-dealers in which misleading or false information is provided to the marketplace, causing a stock's price to rise, upon which questionable players sell their stock. After this, true information becomes available and the stock price generally returns to its prior lower level.
qualified institutional buyer (QIB). An entity, acting for its own account or the accounts of other qualified institutional buyers, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity.
reconfirmation prospectus. Under Rule 419, prior to completing a reverse merger, the shell must prepare and have approved by the SEC a prospectus containing detailed information concerning the private company merging into the shell. This prospectus is delivered to purchasers in the shell's IPO, 80 percent of whom must reconfirm their investment after reviewing the prospectus before the merger can be completed. Those who do not reconfirm receive their investment back, less expenses.
registered broker-dealer. See broker-dealer.
registered stock. Shares of a company's capital stock that have been registered with the SEC either for sale by the company to the public or for resale by a shareholder to the public.
registration. The process of obtaining approval from the SEC for a public offering of securities of a company or shareholder by following the SEC's rules for required disclosures in connection with registering individual shares either for sale by a company to the public or for resale by a shareholder to the public.
registration statement. A filing required by the SEC in form and content approved by the SEC in order to effect the registration of shares.
Regulation A. This SEC regulation permits offerings of up to $5 million to an unlimited number of investors, whether or not accredited. An offering circular is prepared and approved by the SEC, but the form is more streamlined than a full registration statement and does not require audited financial statements.
Regulation D (Reg D). Passed in 1982, this SEC regulation offers a safe harbor ensuring that an offering is a private placement and exempt from registration. The most common exemption used is contained in Rule 506, which permits an unlimited amount of money to be raised to all accredited investors and up to thirty-five unaccredited investors. No specific information delivery is required to accredited investors, but nonaccredited investors must receive all information that would be in a public offering prospectus, unless the information is not material.
Regulation S (Reg S). This SEC regulation provides for an exemption from registration for securities offerings by U.S. companies if they are completely or partially from foreigners or by a foreign company, if raising money completely overseas where some directed selling efforts take place in the United States. No specific information delivery or accredited investor status applies.
Regulation S-B. This SEC regulation outlines disclosure requirements for smaller companies in the small business filing system, generally permitting less information in its offerings and periodic reports. A company fits the S-B system if it has revenues of less than $25 million, is a U.S. or Canadian issuer, is not an investment company or asset-backed issuer, and its parent (if a subsidiary) is also a small business issuer. Also, if the company has a public float (held by nonaffiliates) of $25 million or more, it would not fit into the S-B filing system. The regulation may be amended or even overhauled by SEC Advisory Committee on Smaller Public Companies.
Regulation S-K. This SEC regulation, which predates Regulation S-B, outlines disclosure requirements for companies that do not fit into the Regulation S-B system.
Regulation S-T. This SEC regulation provides requirements for SEC filings made electronically through the EDGAR system.
reporting company. A company which is obligated to file periodic and current reports with the SEC as a result of a recent public offering or voluntary registration under the Securities Exchange Act of 1934.
representations. Statements of fact concerning a company, generally provided in an agreement to reassure third parties and allow them to rely on the statement. For example, "The Company has 10 million shares of common stock outstanding."
resale registration. Effecting a registration of shares held by individual shareholders to permit their resale in the public market. Technically the registration is made on behalf of the selling shareholders, but typically the company prepares and handles the filing.
restricted stock. Shares of capital stock of a company which are not registered or which are not able to be sold in the public market through an exemption from registration.
reverse merger. A method by which a private operating company arranges for its stock to be publicly traded following a merger or similar transaction with a publicly held shell company, pursuant to which the equity owners of the private company typically take control of the former shell company.
reverse stock split. A pro rata reduction in the number of shares of capital stock of a company that are outstanding. Typically requires approval of a majority of shareholders. Often used to increase per-share price, or to make more authorized shares available in order to complete a reverse merger.
reverse takeover (RTO). Another term sometimes used for reverse merger.
reverse triangular merger. A reverse merger in which the public shell company creates a wholly owned subsidiary, and which subsidiary merges with and into the private company seeking to merge. As a result, the private company becomes a wholly owned subsidiary of the public shell company. Typically used to avoid shareholder approval at the level of the shell company and to allow the operating business to maintain its corporate existence.
round lot shareholders. Equity owners of a public company that hold at least 100 shares.
Rule 10b-5. This SEC rule, under the Securities Act of 1933, forbids intentionally and materially misleading a third party in connection with the purchase or sale of a security.
Rule 144. This SEC rule, under the Securities Act of 1933, provides a popular exemption from registration, allowing otherwise restricted securities to be sold in the public market if they have been held for a sufficient period of time, typically at least one year and in some cases two years.
Rule 144A. This SEC rule permits qualified institutional buyers, or QIBs, to trade restricted securities between and among themselves and allows for broader exemptions from registration for those offering securities to QIBs.
Rule 419. This SEC rule, passed in 1992, requires significant safeguards in connection with an IPO or other registration under the Securities Act of 1933 of shares of a blank check. These safeguards include requiring almost all funds raised and shares issued to be placed in escrow pending a merger, an eighteen-month time limit to complete a merger, investor reconfirmation of their investment prior to a merger, and other requirements. An IPO is exempt from this rule if it raises more than $5 million, as a result of which all SPACs are exempt from Rule 419.
Rule 419 shell. A shell company or blank check created through an IPO conducted under Rule 419.
Rule 504. This SEC rule, part of Regulation D, permits up to $1 million to be raised by a private company from an unlimited number of accredited and nonaccredited investors, with no information delivery requirements and the ability of the shares to trade unrestricted following such offering. Most states do not permit Rule 504 offerings.
SAFE (China's State Administration of Foreign Exchange). Chinese regulatory agency that oversees foreign exchange and briefly sought to limit or restrict reverse mergers involving Chinese companies.
Sarbanes-Oxley Act of 2002 (SOX). The largest and broadest change in U.S. securities laws since 1934, SOX shortened reporting times for most companies' periodic reports and insider reports, mandated establishment and maintenance of internal financial controls, added corporate governance requirements, in particular with respect to oversight of a company's audit, eliminated all extension of credit to executives, and required top executives to certify as to the material correctness of their financial statements.
Schedule 13D. SEC filing required to be made by any holder of at least 5 percent of a reporting company's stock if it is part of management or if the holder may seek to effect or influence management.
Schedule 13G. SEC filing required to be made by any holder of at least 5 percent of a reporting company's stock if it is not part of management and if the holder does not seek to effect or influence management, or meets other criteria.
Schedule 14F. SEC filing required to be made and mailed to shareholders if, pursuant to a transaction involving at least 5 percent of a reporting company's stock, there is an arrangement or understanding to effect a change in a majority of the board.
scrubbing a shell. Typically refers to the process of completing a thorough due diligence review of a shell and solving problems that arise during that process.
SEC Advisory Committee on Smaller Public Companies. Established in 2005, the committee is charged with reviewing all aspects of SEC regulation of companies with revenues of less than $700 million. Its report was completed in April 2006.
SEC comments. Most registration statements are reviewed by the SEC, which provides comments to the issuer recommending changes or additional disclosure in the registration statement.
SEC Division of Corporation Finance. The division of the SEC charged with overseeing reporting companies and offerings of securities.
SEC examiner. An individual, typically within the SEC Division of Corporation Finance, who takes primary responsibility for reviewing and commenting on an SEC filing.
SEC filing. Any document formally submitted to the SEC under its rules.
SEC Office of Small Business Policy. Part of the SEC Division of Corporation Finance, which develops and assists in implementation of the SEC's policies that relate to smaller businesses.
SEC Reverse Merger Rulemaking in 2005. In June 2005, the SEC passed a new set of rules directly effecting reverse mergers, which became fully effective in November 2005. In addition to requiring substantial disclosure about the fully merged company within four business days after completing a reverse merger with a shell company, the rule requires every single reporting company to declare whether it meets a newly created definition of shell company. The rule also eliminated the use of Form S-8 by shell companies.
secondary offering. A public offering by a company's shareholders.
Section 404 of the Sarbanes-Oxley Act of 2002. The section of SOX mandating the establishment and maintenance of internal financial controls in certain reporting companies.
Securities Act of 1933. The first law regulating the securities markets passed during the Great Depression and regulating the offering of securities.
Securities and Exchange Commission (SEC). See U.S. Securities and Exchange Commission (SEC).
Securities Exchange Act of 1934. The follow-up to the Securities Act of 1933 established the SEC and set up the integrated disclosure system, along with regulation of broker-dealers, tender offers, and proxy solicitation.
self-filing. The process by which a private company may seek a public trading market for its securities without an IPO or a reverse merger, by completing its own filings with the SEC either to resell securities held by shareholders or to voluntarily become a reporting company.
share exchange. One method of completing a reverse merger by simply exchanging shares of the public shell company for shares of the private company seeking to merge.
shareholder approval. The process by which consent of shareholders is required under applicable state corporate law in the state where a corporation is incorporated.
shareholder base. The number of holders of shares of stock of a corporation.
shareholder rights certificate. A certificate sometimes used to represent the right to receive shares of stock of a company following a reverse stock split, increase in authorized shares, or other recapitalization.
shareholders of record. Holders of capital stock of a company holding physical stock certificates issued by the company's transfer agent. Does not include holders of capital stock who possess only electronic representation of shares through the Depository Trust Corporation.
shares authorized. The number of shares of a class of stock a corporation is permitted to issue pursuant to the corporation's certificate of incorporation.
shares issued. The number of shares of a class of stock a corporation has issued to holders, including shares which may have been redeemed or repurchased by or forfeited to the corporation and not cancelled and are no longer outstanding.
shares outstanding. The number of shares of a class of stock a corporation has issued to holders, excluding shares that may have been redeemed or repurchased by or forfeited to the corporation.
shell broker. An individual or entity who assists parties seeking to purchase or merge with a shell company by identifying and negotiating transactions with shell managers.
shell company. A company with no or nominal assets (other than cash) and no or nominal operations. Also referred to as a public shell company.
shell merger. A reverse merger or similar transaction effected with a shell company.
shell promoter. See promoter.
short selling. The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.
short swing profit rule. Under Section 16 of the Securities Exchange Act of 1934, this SEC rule states that an officer, director, or 10 percent shareholder of a reporting company may not purchase and then sell, or sell and then purchase, any shares of the company's stock within a six-month period and retain profits from the transaction.
specified purpose acquisition company (SPAC). A blank check that completes an IPO pursuant to an exemption from Rule 419 for companies raising more than $5 million. SPACs generally have an industry focus with a related management team, and adopt several of the Rule 419 restrictions to assist in attracting investors.
stock. A form of equity ownership in a corporation.
stock option. The right to purchase stock for a specified period of time and typically for a specified price.
stock split. A pro rata increase or decrease in the number of shares outstanding, typically requiring shareholder approval.
street name. Common term for holding shares electronically through the Depository Trust Corporation rather than through a physical stock certificate.
subsidiary. An entity that is owned more than 50 percent by another entity.
super Form 8-K. Term used to describe the current report required to be filed following a reverse merger with a shell company and including the same information that would be included in a Form 10-SB for the merged company. Also called a super 8-K.
super 8-K. See super Form 8-K.
thin trading. Common criticism of post-reverse-merged companies or trading shells, which is that only limited stock trading exists.
trading shell. A shell company whose common stock may be publicly bought and sold on an established market or exchange.
transfer agent. Transfer agents keep a company's stock records, issue stock certificates when appropriate, help conduct a company's annual meeting by providing inspection services and current lists of shareholders, and help with stock splits, stock dividends, and similar changes.
unaccredited investor. See nonaccredited investor.
unclean shell. Broad term meant to encompass either a dirty shell or a messy shell.
underwriter. Broker-dealer that serves to complete an IPO of a company by purchasing shares from the company at a discount and then reselling them to the broker-dealer's customers.
unregistered broker. Individual or entity performing functions normally required of a registered broker-dealer but which is not registered with the SEC or NASD.
unregistered stock. See restricted stock.
U.S. Securities and Exchange Commission (SEC). The administrative agency established by the Securities Exchange Act of 1934, which implements securities laws and establishes and enforces rules and regulations under those laws.
valuation. Process of determining the worth of a company or worth of a share of stock.
variable interest entities (VIEs). Entities that, under IRS regulations, must consolidate their financial statements as a result of a close relationship between the entities.
venture capital. Financing source for early-stage and emerging, typically private companies.
voluntarily reporting company. Company which is not required to provide reports like a reporting company but chooses to do so anyway.
warrant. A security that entitles the holder to purchase another security (typically common stock) at a specified price during a specified time period.
warranties. A promise that something is in a certain state or condition. For example, "All our inventory is in saleable condition," or, "We have complied with all applicable laws concerning our pension plan." They are typically provided along with representations in reverse merger agreements.
wholly foreign-owned enterprise (WFOE). Entity permitted by Chinese regulations to be owned by foreign entities or nationals.
wholly owned subsidiary. A subsidiary all of whose equity ownership is held by one entity.
Worm/Wulff Letters. Series of letters between the SEC and Nasdaq providing that affiliates or promoters of blank check companies can never sell their shares either publicly or privately under Rule 144 or Section 4(1) of the Securities Act without those shares being fully registered first.
Wulff/Worm Letters. See Worm/Wulff Letters.
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