There are basically two distinctly different types of "public" shell companies being used to do reverse mergers: "Trading and Reporting" corporations and "blank check" corporations.

"Trading and Reporting" shell corporations once held an active business. For any number of reasons the business has either ceased to exist or is in a dormant state. It had filed a FORM 10 with the S.E.C and usually completed an IPO. At its peak, the company's stock was traded on the OTCBB or the Nasdaq National Market.

The perception is that these shell corporations can be used to circumvent the S.E.C reporting requirements and enable the new owners to immediately begin offering and trading their stock on the open market. Unless the shell is bought in bankruptcy, all issued shares acquired through a merger are restricted under Rule 144. To initiate a registered secondary offering, the company is required to submit a complete FORM S-4 disclosure of all business activities to bring the S.E.C. information up to date, regardless of the implied trading status of the shell's stock.

Another area to examine closely is the actual condition of the corporation. Why are they out of business? Are there any hidden problems? Angry employees, upset investors, product litigation, even inconsistencies in prior financial reporting can cause serious legal or SEC problems when they arise later.

A second source of shell companies are public companies developed specifically as a vehicle to be used to accomplish a reverse merger. These companies are commonly referred to as "blank check companies" because their sole purpose is to be a merger vehicle. The SEC specifically allows these types of companies. The Securities Act of 1933, under Rule 419 provides for "a development stage company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies"... Shells developed for reverse mergers are registered and reviewed by the SEC prior to their being made available as reverse merger vehicles. One advantage of this type of company is that they are virtually without risk of undisclosed liabilities.

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