The IPO Shell Game

NEW YORK ( TheStreet --The Jumpstart Our Business Startups Act (JOBS) envisioned helping emerging companies raise money without the cost and extensive reporting requirements typically expected of a company going public. The emerging growth designation has helped many up-and-coming businesses, but it has also spawned abuse of the system.

It isn't simple to find out which companies have chosen to call themselves an emerging growth company. The Securities and Exchange Commission is so overwhelmed with writing the rules around the JOBS Act that its website doesn't have a spot that lists these companies.

However, a search through S-1 filings for this wording in the text generates a list.

The list contains names of viable companies like Workday ( WDAY) and Trulia ( TRLA). Both successfully went public within the last few months and are the ideal candidates to benefit from such help. These are valid companies with real products and services. The staff is real and the CEOs are knowledgeable.

The list also contains some names of a different sort, New Life Bikes, Lake Play, Segway City , Book It Local, Easy Buy Plus and Tarheel Billboard. My favorite? American Critter College. This is an obedience training school for animals. New Life is stationary exercise bikes. Segway City claims to be getting into the segway tour business and Lake Play wants to rent house boats. What do they all have in common? None are currently operating and they are all shell companies.

All of these companies share the same counsel that prepared the boilerplate S-1 filings. They also share the same auditor. Nothing wrong with that. They even share the same bad do-it-yourself web page design.

Some of the information online raises questions. For instance, the website for Tarheel Billboards lists its contact address as 555 Somewhere St.

Then there's New Life Bikes, which lists Tom Schwinn as name of its contact. Creativity isn't in abundance with this group.

The filings also reveal the CEOs for these companies have no knowledge of their companies, no experience running these companies and all state they'll work less than 20 hours a week at their new company. That's comforting. A quick call was placed to one of the CEOs, Stephen Keller of New Life Bikes to ask why would you be a CEO if you know nothing about bikes?

Keller's response: " You'll have to talk to Garvin Capital, they set this up."

Okay, moving on to Garvin Capital. George "Trip" Critz of Garvin Capital set up these shell companies and a quick review of the current shareholders on all of the companies shows a repeating cast of characters. Critz says these businesses are the childhood dreams of these folks and he's just helping them put together a business plan. This is why they have no experience.

Okay, but don't most people then use their savings or a bank loan, or even just maybe start the business in their home or garage before asking the public for money? Not this group. They want the public to fund their folly.

It looks better to present the company to a potential investor by pointing out that the company has filed to go public. Critz noted that having a stock ticker helps generate financing. They can also note that existing shareholders don't plan to sell their shares. But that isn't to say the shareholders aren't planning on getting out. They'll just wait until the second round.

Some look to the SEC to ferret out these shell companies, but the SEC does not look at the merits of a company. As long as everything is disclosed and there are no lies, then the SEC passes no judgment.

As long as New Life Bikes says Keller knows diddly squat about bikes in its S-1 filing, then the SEC doesn't care. If Keller didn't exist then that would be another thing, but if he is a real person and is agreeing to be named CEO, then it's all good. It is buyer beware and up to the investor to read the filing and see the holes for themselves.

Tim Keating of Keating Capital believes these shell companies clog the bandwidth for the SEC. "It takes away from serious companies," he said. He believes there are roughly 200 zombie companies filing to go public.

"It's less about legitimacy and more about liquidity," Keating said. "If an investor believes there's an option for liquidity (going public eventually), then they have an exit strategy."

The lengthy filing makes them look like they're disclosing lots of information. However, when you do a side-by-side comparison of these companies you see that counsel Jillian Sidoti uses the same language for each with only minor changes. The offering sizes are identical, the one employee per company, the same growth strategies and planned milestones for the emerging growth company. Even the cast of characters is the same.

Keller is a shareholder in Lake Play. Lake Play's CEO Marion Palmer is a shareholder in New Life Bikes and so on. Critz and his wife Dayna Critz are shareholders in all the companies as is Critz's partner Forrest Garvin and his wife, Teresa.

Sidoti says there is absolutely nothing fraudulent about these filings. That they were all filed at the same time attracts attention, but everything is legit. It just happens to be a group of individuals that are all supporting each other in their business endeavors. Sidoti said, "If this wasn't legitimate, then you'd see all kinds of LLC companies and you don't see that here."

However, there are several LLCs that appear as shareholders. Teresa Garvin is Manager of G9 Holdings, LLC. Forrest Garvin is Manager of GW Grace LLC. There is also a Winchester Investments LLC that is part of the same list of shareholders.

Many potential investors would probably not know that there are several similarities between all five of these companies. They would probably not know they all share the same shareholders. They might not know how to find the filings and read them to see that the CEOs have no idea what they are doing. They might not know how to find the silly fake websites.

Fraudulent? No. Sketchy? The investors can decide that for themselves.

-- Written by Debra Borchardt in New York.

>To contact the writer of this article, click here: Debra Borchardt.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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