A New Jersey lawyer, Gregg Jaclin, entered into a settlement agreement (available from the SEC online here) with the US Securities and Exchange Commission (“SEC“) earlier this fall in respect of several allegations, including over the practice of the creation and resale of shell companies. The settlement states that two defendants ran a shell factory. As part of the settlement, Jaclin is prohibited as a lawyer from appearing before the SEC.
Jaclin was also indicted in May 2017, by the US government (available from the Department of Justice here) for alleged similar activities.
According to the indictment, Jaclin’s former law firm is alleged to have signed off on a closing opinion for a Canadian issuer which allegedly contained false information that was relied upon by investors and the regulator.
Shelf and Shell Companies
Shelf and shell companies are not the same thing.
A shelf company is created and parked on a shelf to age so that it gives the illusion of longevity. Its directors and incorporator are one or more lawyers of the firm. The more it ages, like wine, the more valuable it becomes. When clients buy shelf companies, they may pay upwards of hundreds of thousands of dollars for each of them. Some law firms create multiple shelf companies for the sole purpose of flipping them to clients.
Shelf companies have the following characteristics: they are not new; their corporate filings are in perfect order; and their original legal owners are lawyers or staff at the law firm that created them or a numbered company owned by the law firm.
Both shelf and shell companies may have subsequent beneficial ownership structures to obfuscate the legal owner and so whether a company is a shelf or shell company is not indicative of whether it will have obfuscated ownership.
Flipping shell or shelf companies should not be confused with the normal situation where a law firm is hired, arms length, to incorporate a new company for a client, and bills the client its normal fees associated with incorporation.