RTOs, Shell Companies & the Underbelly of Business

Sunday’s N.Y. Times contains a must-read story on the underbelly of business: Taking companies public via reverse takeovers of shell companies. I can’t tell you how many times I have had VC-frustrated entrepreneurs come to me with virtually the same story about how they had been approached by a lawyer representing someone with a shell company interested in taking them public. From now on, I’ll happily refer them to this article:

At its most basic, the selling of a company’s initial public shares is a little like hawking hot dogs at the ballpark. Someone discloses what’s for sale – all beef, pork, kosher, whatever – and potential buyers decide if they want in.
But there is another way to go public, one that offers fewer protections to investors and more opportunities for mischief. Taking this route, a shell company – the corporate equivalent of an empty bun – is sold to the public. It never has much, if any, meat: no revenue, no earnings, no assets.
Once the shares in these shells are distributed, lawyers, accountants and financiers can come along and load them up with whatever they want by merging private companies into the public shells. But when the meat is added after the buns are sold, the quality is rarely top-notch.