An auroral arc undergoes various types of deformations, such as curls, folds, and spirals. In this paper we examine the formation mechanism of folds by a plasma simulation method. We suggest that folds, as well as curls, can arise from electrostatic shear-induced instabilities. The differences between the two forms are controlled by the presence of ambient ions that must be present to shield the electric field of the precipitating electron charge sheet. It is shown that curls form when the ion sheath thickness is large in comparison with the electron sheet. Folds form when the ion sheath is thin and lags slightly behind the electron guiding centers, setting up an additional electric field that controls the later stages of instability growth.