Companies subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), without current business operations (a “shell”), and which are trading on the over the counter market (“OTCQB, OTCQX and OTCBB”) have become the vehicle of choice for private companies seeking to go public through a reverse merger.

OTCQB, OTCQX and OTCBB shells have replaced non reporting pink sheet traded shells in popularity for many reasons including issues with due diligence, DTC eligibility and the unavailability of Rule 144 for non reporting pink sheet shells.

The importance of a reporting company may be self evident in that a potential merger or acquisition candidate can learn of outstanding liabilities, pending or threatened lawsuits, disputes with auditors and other matters by simply reviewing publicly available filings on the SEC EDGAR database. However, in addition to this obvious benefit, using a fully reporting SEC compliant shell as a reverse merger vehicle as opposed to a non-reporting entity has other benefits. Specifically, a company can be assured that historical records are available to meet SEC requirements for the filing of a new registration statement. In addition, FINRA and DTC both require historical records on all past issuances, which are often not available by non-reporting entities. Moreover, a reporting shell is less susceptible to market manipulation, the concealment of beneficial ownership of key shareholders and other potentially fraudulent and unethical activities.

OTCQB, OTCQX and OTCBB Due Diligence

Due diligence generally includes (but is not limited to):

Where Do OTCQB, OTCQX and OTCBB Shells Come From?

OTCQB, OTCQX and OTCBB Shells generally derive from a failed public company business. A company may have traded on the bullet board when operating and subsequently suffered a failure of the operating business leaving behind a shell. When this occurs, these companies may no longer be able to meet the listing requirements of their respective exchanges such as trading price or market capitalization. The Company then “falls off” to the OTCQB, OTCQX or OTCBB over the counter market. When the operating business ceases entirely it leaves behind a shell Company.

The OTCQB, OTCQX and OTCBB Shell Company has no operations and no or nominal assets and liabilities, but the shareholders remain. In the process of an operating business failing and leaving behind a OTCQB, OTCQX or OTCBB Shell, many issues must be addressed in order to ensure that the successor business or merger candidate does not end up assuming the liabilities and responsibilities of the former operating business. In most cases these issues can be rectified. For example, prior liabilities may be written off if the statute of limitations has passed, or the debt may be settled.

The process of diagnosing potential issues with a OTCQB, OTCQX and OTCBB Shell is known as Due Diligence.

Cleaning Up OTCQB, OTCQX and OTCBB Shells

Cleaning up OTCQB, OTCQX and OTCBB Shells is primarily a legal function. Some of the specific details that constitute the process include:

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