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Why cash shells are becoming more valuable

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Recent restrictive listing rule changes at the London Stock Exchange mean that existing cash shells and SPACS have become much more valuable. Effectively an RTO (reverse takeover) on both premium and standard segments must now be £30m or more. No more tiddlers, which will now have to consider alternative markets!

Carried out properly and professionally cash shell deals remain one of the most exciting ways for the more speculative investor to experience 5x and sometimes 10x profits! But ‘caveat emptor’.

Although I cut my teeth in the city as an equity analyst at a leading broker, I have been fascinated by publicly quoted ‘shells’ since I was a writer on micro-caps at the FT and later as investment editor at the Telegraph group. That was some 40 years ago, when the ‘shells’ were so scarce that there was a very large premium over net assets per share payable in order to secure control.

Some of the big conglomerates and market names of subsequent years were born out of a ‘shell operation’, as it was then known, and consequently they increased in number after the huge market swings of the early 1970s.

I have been a founder or directly involved in some 34 ‘shell’/quoted vehicle ventures in my career in the financial and corporate world, spanning several countries. That’s 12 in the UK, 14 in Australia, five in Canada and the US and two in Hong Kong. Obviously not all fared well, as shares are always subject to the vagaries of the investment horizon, but 70% could be classed as successful. There is presently a growing appetite to list using the ‘shell’ route, so much so they have been named SPACS (special purpose acquisition companies).

The long-term benefits of being publicly traded or quoted are numerous and include higher company valuation, improved liquidity for shareholders, the ability to use paper in exchange for acquisitions and an incentive to offer or retain employees with publicly traded shares and/or option schemes. Moreover, having stock exchange quoted status brings with it more accountability and higher corporate governance standards which provide extra comfort for shareholders and other potential investors.

Generally speaking, cash shell transactions usually take private companies to market more quickly and cheaply than from perhaps a macro or black swan event.

The shell’s business is not to everyone’s taste or satisfaction, however, as along with the notable success stories there have also been come spectacular failures and over the years many ‘shellmeisters’ have come and gone.

Unquoted cash shells: what are they?

Listing admission costs on AIM, LSE and AQUIS exchanges are unnecessarily expensive, arguably a waste of valuable funds and little liquidity once quoted.

There is also a minimum £6m cash needed on AIM, post listing placement restrictions on Standard and substantial minimum £30m deal size on Premium admissions.

But why list a start up quoted shell at all? An unquoted shell has many more advantages!

Investors typically buy shell shares for the contemplated uplift in the value of the shares post a reverse take-over (RTO) so it follows that there would seem little argument for selling one’s shell shares before the reverse acquisition transaction takes place.

Bearing in mind that RTO costs are substantial and ongoing mandatory sponsorship fees onerous, it begs the question as to why pay for substantial prospectus and other issuing costs before the main deal? It is an effective duplication of expenses which seems unnecessary when an alternative service is readily available on a ‘matched bargain’ platform.

An unquoted platform admission costs could only be circa £10,000 (based on 5 % fee) on a cash shell admitted with a minimum of only £200k cash subscription. They can be simple limited companies with model articles of association. They are lightly regulated via a simple one page investment strategy message and a share subscription letter with no requirement for a minimum number of shareholders. There are also no immediate dealing disclosure requirements for the founder directors. The newly formed company just needs an ISIN number and a Crest account facility for share settlements, both of which are part of the unquoted service.

The capital base of the shell can be topped up at anytime by a private placement letter preceding an RTO and/or the issue of share options. This would be to incentivise the people who source the deals and take responsibility for the main post RTO capital raisings.

Summarising, an unquoted cash shell is a commercially practical method of avoiding the unnecessary duplicative costs of starting a shell on the public markets. In short there is only one prospectus needed…not two!

JP JENKINS, the oldest established unquoted share trading platform can provide unquoted cash shells to suitable candidates.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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