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So, what exactly does a cash shell involve?
The premise is as follows – this is a company already listed on the stock exchange which has some money in the bank but currently isn’t operating any business. Private companies buy into these and list them on the stock exchange, as they don’t have the same time implements and added costs as listing a new company involves.
It’s not uncommon for companies to buy into cash shells so they can carry out a reverse takeover, which is where a private company buys enough shares in the cash shell to gain control of it, then they list it publicly. Companies do this because it’s a far less time-consuming process than it is to list a new company, or to follow the costs and lengthy regulations processes of an IPO.
Yes, this process is far quicker – but as is often the case, there’s a catch. This method may seem like the ideal approach but it comes with added risks.
Buying into an already listed company may sound like a breeze – there are no complicated regulations to follow, or time-consuming processes to wait on. Cutting out the long-winded IPO process does sound appealing but is it really that simple?
The reality is that with cash shells come many implications:
1. They are expensive – it will cost around £500,000 to buy into one of these. Yes, this saves on costs elsewhere, such as regulations fees but for this price you’re buying into something that you don’t know everything about. In reality, you could be investing into more than you realise.
2. Investors don’t control all the outstanding shares. Buying into a cash shell usually results in owning around 90% of the company, meaning that you have no control over the other 10%.
3. As soon as the company goes public the other shareholders are free to sell their shares as and when they wish to, which, in doing so results in dropped share prices.
4. A cash shell is an existing company, so who’s to say it doesn’t already have existing debt? You could merge your successful business into it, then six months down the line a lawyer could phone you up insisting you owe an outstanding amount of money. The issue being, you weren’t with this company when it was first listed, so how do you know if it has any hidden debts or not and how can you prove otherwise?
Buying into a cash shell does cut down the initial listing process but who knows what secrets it has lurking in the background. The fact is that cash shells come with many unknowns, which could resurface at any moment and cause added issues.
The one exception for cash shells is listing on the OTC in New York, as the approval times and other factors here make this a more viable method of listing. However, this is the lone exception and doesn’t rule out the fact that in most cases, the associated risks that come with cash shells,
Considered a backdoor approach, cash shells are generally frowned upon by financial experts. These sorts of shortcuts in business usually come with unprecedented risks. Yes, cash shells are a far quicker way to list a company than the rigmarole of starting the listing process from scratch but the added complications they come with far outweigh the benefits. Read more about Main Market vs. AIM on the London Stock Exchange.
We don’t recommend cash shells to our clients as we believe they are risky, complicated and can cause added issues. Therefore, we advise our clients to go through the full listing process, as listing a brand new company means no hidden baggage, or unknown shareholders.
Overall, cash shells come with uncontrollable factors, are expensive, and hold no guarantees that they will actually work.
If your company is planning to go public and raise funds on the capital markets, we look forward to hearing from you.
The easiest way to get started is to request a free evaluation. By providing minimal information about your company and capital needs, we will be able to provide you with a quick assessment by email. In most cases we can tell you if your business is ready to go public, or not yet.
We’ll also let you know if we think that Swordblade & Co are a good fit for your flotation plans, and anything else that we may think can help you.
Alternatively, if you are ready to talk in depth about floating your company, we recommend you arrange a paid consultation with one of our partners. It can usually be scheduled within a few days and is the fastest way to get detailed advice.
In 1700, the Hollow Sword Blade Company began a banking and securities trading business in the City of London. Today, from the same location, Swordblade & Co helps ambitious growth companies access public markets. We are proud to continue a rich, centuries-old legacy of assisting entrepreneurs in building their companies and visions.
Swordblade & Co
1 Royal Exchange,
London EC3V 3DG
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