She sells seashells down by the seashore, as the famous tongue-twister goes. He, on the other hand, sells corporate shells in Salt Lake City and Denver, and the Securities and Exchange Commission is not at all happy about it. In fact, SEC investigators have been doing all they can lately to crack down on the practice.

But what about using a "clean" shell as a means of taking a private company public? The technique involves merging the private company with a corporate shell -- that is, a public company that exists in name only (or better yet, one that still has a few assets). In most cases, the private company's owners find a shell whose shares are being traded, however sporadically, on the intrastate penny-stock markets of Salt Lake City or Denver, or on regional over-the-counter exchanges. They then hire a lawyer to investigate the shell to make sure that it has no hidden liabilities, outstanding lawsuits, or long-lost shareholders. If everything checks out, they proceed with the merger.

Using this approach, the private company are able to avoid the registration expenses -- as well as the waiting time -- required to make a bona fide initial public offering. And the stockholders of the shell wind up with shares in a real company.

So everybody is happy, right?

Well, no -- at least not in the opinion of Gail Weggeland, the attorney in charge of the SEC's Salt Lake City office. He believes that private companies shopping for a clean shell are going to wind up with a pig in a poke.

"People who peddle shells are by and large crooks," says Weggeland. The brokers -- he charges -- are often in cahoots with the small group of investors who have the control. Asserts Weggeland: "These guys will put out the rumors about oil discoveries in Oklahoma or an exciting merger, and then sell when the stock takes off so they can get most of the benefits."

Even if the shell is apparently "clean," Weggeland warns that there may be surprises down the road. For one thing, it is generally considered a securities fraud to sell existing stock in an inflated market to raise funds for a newly organized business. Moreover, unknown corporate records or shareholders may suddenly surface. "Merging with a shell is about as risky a corporate venture as you can imagine," the SEC attorney says. " . . . Chances are, you'll be selling your corporate birthright for a brief market flurry."

Many investment bankers share that view. "I think it's an exercise in stupidity," says Gil Mintz, founder of Broadview Associates in Fort Lee, N.J., a financial consulting firm that specializes in mergers and acquisitions solely for the computer services industry. "Within computer services, at least, it makes much more sense to go through an underwriter. After all, you need the underwriter's support in the aftermarket. You still have to hire a financial p.r. firm. So where's the advantage?"

Others aren't quite so sure. "There have been some pretty raw situations," admits John Potter, president of Potter Investment Co. in Salt Lake City. "But it's not all one-sided by any means."

Looking across the financial landscape, there do seem to be a few instances where shells have been put to nonspeculative use. Evolution Computer Systems Corp., of Orange, Calif. (see INC., October 1982, page 53), merged with a public shell in 1981, becoming Evolution Technologies Inc. in hopes of making use of the shell's losses -- if and when Evolution ever generated profits to shelter. (It didn't, and ended up filing for protection under Chapter 11.) And there have been others. Just last February, two privately held companies -- Video University Inc. of Jackson, Miss., and Video Education Inc. of Reno, Nev. -- merged with U.S. Rich Hill Minerals Inc., a Utah-based shell, which was traded over-the-counter. The new entity is called Kelwynn Inc.

"An initial public offering wouldn't have guaranteed us any kind of market following," says president and chief executive officer George Wynne, who figures he saved hundreds of thousands of dollars by going the route he did. On the other hand, he concedes that Kelwynn will have to spend some of those savings in connection with a secondary offering, which will probably come next year.

Nevertheless, he insists that, in his case, it made perfect sense to merge into a shell, and he may be right. If you are planning to sell shells, however, it is still probably a good idea to stay near the seashore.