A shell corporation is a company that is incorporated but has no significant assets or operations. These corporations may be formed as an alternative venture financing mechanism.
Shell company financing works in two ways. In many cases, the shell corporation is created from scratch. The purpose of these shells is to raise money and to get a number of shares outstanding into the public’s hands. In most cases, the shares are sold in units. That is, the shares are sold as one share of common stuck plus warrants at the current offering price.
The “empty” shell is then merged with the operating company. The merged companies begin to report operating results and when the results are good, existing stockholders exercise their warrants and provide needed capital into the company.
A second type of shell corporation is formed when the company seeking capital identifies an existing shell or inactive public company (IPC) as a candidate for a reverse acquisition. This typically occurs after a public company emerges from bankruptcy. At this time it may be void of assets other than cash. In fact, the principal asset of the IPC is it’s often its public registration and a roster of shareholders from which new capital may be raised.
Shell corporations are a quick and cost effective way of taking a company public and raising public capital. However, typically bridge capital is required to finance the process and take the company to a point where investors are interested in exercising their options.
While most companies seeking venture capital initially think about angel investors and venture capitalists, a large alternative source of financing is federal grants and loans. The two largest federal grant programs are run by the Small Business Administration (SBA), and by Small Business Investment Companies (SBICs).
An SBA loan, regardless of whether it is a direct loan from the SBA, or, as is more common, a bank loan guaranteed by the SBA, is essentially a bank loan. The benefit of it versus a traditional bank loan is the rate. SBA rates are typically much less than traditional business loan rates.
In most cases, in a guaranteed SBA bank loan, the SBA guarantees 90 percent of the loan will be repaid to the bank. As such, banks are at much less risk than in most other loans, and are a bit more flexible with regards to who they offer these loans. However, the SBA usually requires the founders of the company to personally guarantee the loans, which makes them risky should the venture collapse.
Alternatively, Small Business Investment Companies (SBICs) are privately organized corporations that are licensed and regulated by the SBA. Small or emerging businesses which qualify for assistance from the SBIC program can receive equity capital and/or long-term loans from these companies. Essentially, these companies provide their own capital, which is supplemented by federal funds, to the companies they fund.
Interestingly, U.S. taxpayer’s benefits from the SBIC program as tax revenues generated from successful SBIC investments have more than covered the cost of the program. Likewise the program has created hundreds of thousands of jobs.
In summary, SBA and SBIC financing are viable alternatives to financing from angel investors and venture capitalists and should be considered in the capital raising process. Similarly to angel and VC financing, companies seeking SBA and SBIC financing need a strong management team and value proposition, and a highly professional and compelling business plan in order to raise the capital they need.
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Frequently Asked Questions
Corporate Hierarchy Go Over the bosses Head?
By: coachpauline | 26-09-2008
I was hired at a financial services company 8 months ago. As a commission based sales person my compensation plan including a $25,000 salary was based on selling a product where my 1st yr earnings were projected to be between $100,000 &150,000 depending on my skill. The marketing that I was promised didn't materialize, the Sr. Vp who hired me left a new VP came in and the focus of my division changed to selling a product where the money to be made by a sales rep is alot less, so the new people who have come in have been hired at a higher salary and a higher commission. Everyone else from the old regime has been fired or left. I asked to be brought up to par with the new workers, especially since I am by far the top performer. I kept being put off, told that a newer, even better permanent compensation plan would be put in place as soon as a new Sr Vp arrivedand they dont want to change my comp plan twice. The New Exec Vp Is here-This newer, better comp plan was supposed to happen for the last 2 months-now I've been told it wont be until Jan. At an evaluation I was told I am an outstanding performer, I will be up for a promotion when a management position opens up in my division etc. Meanwhile my sales #'s are always #1 or #2(only ever beaten by my supervisor who has years of experience) while taking time out of my sales day to bring new people up to speed, who are on a better comp plan and at this comp plan I will be lucky to earn $50,000. My boss keeps putting me off until this newer comp plan goes into effect, but I cant afford to be producing results and not earning for another 3 months. SHOULD I GO OVER MY BOSSES HEAD AND EMAIL HIS BOSS W/ MY DILEMMAAND CC MY BOSS OR WRITE MY BOSS AND CC HIS BOSS?My bosses boss has the ultimate decision making power. I feel like I have some leverage right now that I may not have down the road. I am close to closing a huge deal for them that will be the largest in their portfolio. I have never worked in a corporate environment before-was a business owner so don't really know how this stuff works, but I am getting pretty fed up. Also I am going to be sharing my leads with all these new people and at this comp plan my sales will certainly drop. I will not go out and bring in more business from relationships that I have made over the years if I am not paid what I am worth and at that point I will have no leverage.
Fund management industry
By: Naw | 25-09-2008
what is a fund mangement industry?what are the trends and issues in that industry?
The overall goal of emergency management is to?
By: scott | 24-09-2008
the overall goal of emergency management is to?
What is the vision of tesco ?
By: karim | 24-09-2008
what is the vision of tesco ?
Explain how the four functions of management ...
By: kache620 | 23-09-2008
Explain how the four functions of management support the creation and maintenance of a healthy organizational culture.
Is there any NetKeeper installer available for mac ...
By: odey | 18-09-2008
is there any NetKeeper installer available for mac OS?
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