What is the purpose of a blank check company?
What Is a Blank Check Company?A blank check company is a publicly-traded, developmental stage company that has no established business plan. It may be used to gather funds as a startup or, more likely, it has the intent to merge or acquire another business entity. Blank check companies are speculative in nature and are bound by Securities and Exchange Commission Rule 419 to protect investors. Show
Key Takeaways
How a Blank Check Company WorksBlank check companies are often considered penny stocks or microcap stocks by the SEC. Therefore, the SEC imposes additional rules and requirements of these companies. For instance, they must deposit the raised funds into an escrow account until shareholders officially approve an acquisition and the business combination is made. Also, these companies are not allowed to use certain exemptions under Regulation D of the Securities Act of 1933. Rule 504 of Regulation D exempts companies from registration of securities in a 12-month period for offerings up to $10 million. The SEC prohibits blank check companies from using Rule 504. In 2020, 50% of IPOs were SPACs. A type of blank check company is a "special purpose acquisition company" (SPAC), which is formed to raise funds via an initial public offering (IPO) to finance a merger or acquisition within a certain time frame, typically 24 months. The money is held escrow until a combination transaction closes; if no acquisition is made after 24 months, the SPAC is dissolved and funds are returned. The SPAC managers normally hold 20% equity with the balance going to subscribers of the IPO. As of 2020, SPACs make up about 50% of the U.S. IPO market. SPACs enjoyed a spate of popularity during the government shutdown of late 2018 and early 2019 when the SEC was unable to proceed with the review of traditional IPOs. During this period, SPACs were able to go public without the SEC’s approval or feedback, thanks to SEC regulations that allow companies to make their own IPO registration effective if they’re willing to establish a set IPO price at least 20 days before going public. While SPACs may have gained some media attention during the extended government shutdown, these IPOs offer some risk for investors. For example, investors don’t know ahead of time what company a given SPAC will acquire, though some may give investors information regarding the sector they intend to operate in. Example of a Blank Check CompanyAfter a successful public relations campaign run in 2014 that informed the public that the highly popular snack cakes known as Twinkies would no longer be made, the Gores Group, a Los Angeles-based private equity firm, created blank check company Gores Holdings in 2015. The company raised $375 million in an IPO and became the vehicle that facilitated the purchase of Twinkie-maker Hostess Brands that year with other institutional investors. Following that success, The Gores Group decided to form Gores Holdings II in 2016 "for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses," according to the S-1 filing. A blank check company is a developmental-stage company that is publicly-traded but has no established business plan or operations. These companies can be utilized to raise funds as a startup entity but are typically founded with the intent to either acquire or merge with a private company. Blank check companies are considered speculative in nature and are usually classified by the Securities and Exchange Commission (SEC) as penny
stocks once they are listed. Blank check companies are typically founded by investors or management-oriented groups who are seeking to bring their skills and resources to a private business with a good product or business plan but may lack funding, direction, or expertise. In some cases, the group may already have a target acquisition in mind, but it’s also common for blank check companies to form and then seek out a private company to merge with or
acquire within a certain industry. Once the blank check company has been listed as a public offering, third parties can invest in it by purchasing shares. All funds received from the offering are placed into an escrow account until the company is ready to conduct a merger or acquisition. After the blank check company has acquired or merged with a target company, the transaction is publicly announced and the blank check company is converted
to the new entity. The company is then listed on stock exchanges under a new ticker symbol. The most popular type of blank check company is a special purpose acquisition company, or SPAC. The main purpose of a SPAC is to acquire a private business and bring
it public within a specific amount of time. Prior to the acquisition or merger, the SPAC raises money from investors through an IPO, with all funds placed into a trust until the SPAC has identified a target company to officially acquire or merge with. Investors of a SPAC are typically unaware of what company it will acquire, so the money invested is seen as a “blank check.” Prior to an acquisition, the SPAC must obtain shareholder approval, with 80% of investor funds put towards the deal.
Should the SPAC fail in securing a shareholder-approved deal within a certain time frame (often 24 months), the money is liquidated from the trust and returned to investors. Insurance Needs for a Blank Check CompanyAfter completing an acquisition or merger, company ownership should ensure its complete readiness for ongoing regulatory compliance. This often includes examining and possibly upgrading its insurance coverage, such as property insurance, tax liability insurance, cyber liability insurance, and other insurance areas, depending on the company’s business. Woodruff Sawyer is the market leader for placing Directors and Officers (D&O) insurance for IPO companies. Woodruff Sawyer is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a crucial aspect of the merger & acquisition process. For more on Blank Check Companies:
INSIGHTS Are SPACs Going to Lose Their Safe Harbor? Learn more about what “safe harbor” is, the legal ramifications of its elimination, procedural differences, and the implications for SPAC sponsors and their targets. Jon JanesVice President, Account Executive, Management Liability Practice
What is a blank check company?A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person.
Why do people invest in blank check companies?Blank check companies are typically founded by investors or management-oriented groups who are seeking to bring their skills and resources to a private business with a good product or business plan but may lack funding, direction, or expertise.
Why do companies use SPACs?SPACs offer target companies specific advantages over other forms of funding and liquidity. Compared with traditional IPOs, SPACs often provide higher valuations, less dilution, greater speed to capital, more certainty and transparency, lower fees, and fewer regulatory demands.
What happens when you invest in a blank check company?Investing in a Blank Check Company Stock
Investors purchase shares or units of the blank check company, which includes a partial or full warrant, and then await the company's acquisition of a target. The warrant grants the buyer the right to obtain stock at a certain price.
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