A blank check company is a
development stage company that has no definite business plan or purpose or has
laid out its business plan to connect in a merger or acquisition with an
unidentified company or companies, other entity, or person. These companies in
general involve tentative investments and come under the SEC’s definition of
"penny stocks" or "micro cap stocks".
The companies are called the
blank-check companies because this is what they get from the investors—a blank
check for the company to select any (or no) targets for take-over. Since this
is a blind-faith gesture, investor confidence depends on the status of the
company principals.
The SEC prohibits the blank-check
companies to use some of the exemptions from the registration requirement when
selling their securities. The Security and exchange commission do so because of
the nature of the blank-check companies.
If a blank check company registers
for the security offering it should comply with some additional requirements
for the protection of the investors, including depositing most of the raised
funds in an escrow account until an acquisition is settled, and it requires
shareholder approval of any identified acquisition.
“Special purpose Acquisition
Company or SPAC” is a type of Blank Check Company. A SPAC is established
specifically to raise funds in order to finance a merger or acquisition
opportunity within a limited time period.
The Securities exchange commission
has laid out some rules for the blank-check companies. At least 80% of the
total shareholders’ money should be utilized in all the acquisitions, and each
acquisition is subjected to shareholder approval. If the company fails to find
or execute at least one transaction by a given date (generally two years from
inception), the funds plus accrued interest less operating expenses are
returned to the shareholders.
Most of the blank-check companies
issue initial public offerings of around 10 per share, but they can also raise
funds without the approval of shareholders by issuing other class of stocks. So
many companies do this to keep them safe from hostile take-over. Some of these
companies have more than one class of preferred stock, and it’s not easy if not
impossible to differentiate one from the other. One of the major problems which
arise in researching such area is that there is little to no information on the
blank-checks which very well explains their thin trading volume.
There are about sixty to hundred
blank-check companies trading on the US exchanges. The major player’s, trade on
AMEX.
The Blank check companies can succeed in for what they
have been formed only when all hopes turn out into the final result. Management
should be able to find an appropriate acquisition candidate and settle a
bargain price. Operators must run the enterprise well. The stock market must
shore up a rising valuation for the acquired company. But these factors seldom
coincide.
Generally among all the factors one or two go wrong.
Either the company fails to find a willing target and returns the money to
investors or if everything goes on the track at times the company overpays for
the acquisition, leaving IPO investors with big losses.
Since 2003, a total of 98 U.S.
companies were set up to form such special-purpose acquisitions, according to
SPAC Investments Ltd. The average annualized return of such so-called SPACs has
been negative 18.4% in the stock market since 2003, against an average of 6.7
percent for the Standard & Poor’s 500 Index.
The past records of the
blank-check companies are full of scandals, and U.S. regulators have time after
time made tougher rules on how these businesses operate. One of the rules says
that the acquisitions can’t advance without shareholders consent. Managers are
prohibited from paying themselves huge and excessive fee before they have done
any work or gamble away IPO earnings in ways that shareholders wouldn’t
welcome. These rules safeguard the U.S. investors to a large extent and should
also be followed by other countries’.
In order to regulate the blank
check company in the most effective way, such offerings should be off-limit to
anyone except to the sorts of wealthy investors who by now participate in hedge
funds and private equity. These kinds of rules will be important and efficient
to safeguard the blank-check deals that allow perilous foreign companies to
trade on U.S. or European exchanges without fulfilling usual listing
requirements.
Global capital markets already make available
ample of different ways for the best corporate acquirers to pursue their craft.
At a time when more transparency and disclosure are critical to rejuvenate
public confidence in the markets, the intrinsically opaque nature of the
blank-check companies strikes a dissonant note.
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