I would like to discuss today. I first became interested in the topic after reading a very the importance of patience in forex market write up of a NOL shell.
The main purpose of this post will be to talk about what NOL shells are, what to look for, and the benefits and risks of investing in these types of companies. So, first things first, what are NOL shells? A NOL shell is essentially a company that previously incurred substantial losses over an extended period of time and currently has no business activity. The DTA will allow profitable companies to offset future income against the DTA.
35, which will be able to offset future tax expense. The most common type of companies that become NOL shells are biotech companies. D and rarely, if ever, profits. D efforts and decide to liquidate. However, for savvy investors, these types of companies are exactly what you’re looking for. These companies have often incurred millions of NOLs and trade for a fraction of the related DTA value.
Rules limiting NOL “trafficking”: Obviously, the IRS frowns upon such activity, so there are a few things to consider when investing in NOL shells. Section 382 of the Internal Revenue Code states that if a “change in ownership” occurs the NOL will subject to annual limitations. I won’t discuss all of the details of the annual limitations as that would get complicated, but the short story is the limitations would significantly reduce the NOL value. Monetizing NOL shells: There are two main ways to win with NOL shells. The two main reasons to go public through a reverse merger are that it is faster and cheaper than a traditional IPO. Both of these transactions should sufficiently compensate NOL shell shareholders. Types of NOL shells: I like to classify NOL shells into several different categories as these companies generally evolve through three stages.
The first stage is what I like to call the “SPAC” phase. PE firms to allow individual investors to gain exposure to private equity like transactions. I like to call the “mature phase”. I call it the “developing NOL”.
This is a NOL shell that has developed a strategy for monetizing its NOLs, but is still in the process of implementing on its strategy. I have detailed in several posts. Benefits and risks of NOL shells: There are three main reasons why I like NOL shells. The first reason is they are generally uncorrelated with the market. With overall equity valuations artificially inflated by central bank money printing, it would make sense to own assets that are uncorrelated with the broader market in the event of a correction.
Investing in NOLs can also be risky, particularly if you’re not the one in control of the Company’s acquisition search. Most of the risks I will talk about will be in cases where you are not in control of the NOL shell. In these cases, you have to be very careful who you’re in bed with. Does this person have experience monetizing NOLs? A experience to pull off a transaction like this. Will this person completely screw over minority shareholders? Has the person screwed over minority shareholders in past deals?