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Technology Stocks
Blank Check IPOs (SPACS)
An SI Board Since January 2005
Posts SubjectMarks Bans Symbol
3765 141 0 SPACS
Emcee:  Glenn Petersen Type:  Moderated

Wall Street has never been bashful about recycling old products and concepts. One of the recent concepts to be recycled is the blank check IPO. Blank check companies are also known as Special Purpose Acquisition Companies (SPACS).

A blank check company is a development stage company that has been formed for no specific purpose other than to complete a merger or acquisition with an operating entity, the identity of which is unknown when the company is formed. Because such transactions generally, but not always, trigger a change of control, with the shareholders of the acquired company now owning more than 50% of the combined entities, the majority of these transactions are accounted for as reverse mergers.

Blank check IPOs had a run of popularity during the 1980s. However, the abuses of that period, particularly the promotional activities of insiders looking to make a fast buck through the promotion of their stock rather than the acquisition of a viable business, led the SEC to place some significant restrictions on the practice.

The SEC has discouraged blank check IPOs with Rule 419, which regulates the issuance of “penny stock”, defined as shares priced below $5, by companies that are in the development stage. Rule 419 pertains to all companies with assets of less than $5 million. Because all of the recent offerings have been priced over $5 per unit and have each raised a minimum of $9 million in gross proceeds; the offerings have been exempt from the provisions of Rule 419.

The newly public blank check companies have been sensitive to the failures of their predecessors. To alleviate the concerns of potential investors, all of the recent offerings have voluntarily complied with most of the provisions of Rule 419 and the companies have been careful to structure the transactions so that the founders will not be in a position to enrich themselves at the expense of their new public shareholders.

Most of the funds raised in a blank check IPO are placed in a trust account and can only be released in the event that the company completes a business combination that wins approval from a majority of the company’s public shareholders. Depending on the individual company, a proposed transaction can be blocked if 20% to 40% of the non-insider shares are voted against the transaction. Regardless of the outcome of the vote on the proposed acquisition, dissenting shareholders have the option of having their shares redeemed in an amount that is equal to their pro rata share of the funds held in the trust account. If a transaction is not completed within a specified period that can range from eighteen to thirty months, the company will be liquidated with the proceeds distributed to the public shareholders. The insiders will not receive any of the proceeds.

All of these offerings have been artfully priced. Many of the early deals have been priced at $6 per unit, with each unit consisting of one share of common stock and warrants to purchase two additional shares of common stock at $5 per share.

Subsequent to the IPOs, the common shares have generally traded at a slight discount to their liquidation value. When investing in these securities, the conservative play is to invest in the common shares, which are generally trading at or near their liquidation value. The worst-case scenario: You get your money back. The more speculative route would be to buy the warrants.

I would encourage everyone to do some due diligence before purchasing any of these securities. They are speculative. Deals do crater before they are approved and there have been a lot of bad acquisitions. If you do purchase any of these securities, please do not allocate a significant portion of your investment portfolio. It might also be advisable to buy a basket of securities, rather than focusing on one company.

At the very least, the following risk factors should be taken into consideration:

-- Many reverse mergers fail. Companies that go public via this route generally do so because they would be unable to complete a traditional IPO. However, the magnitude of the dollars currently being raised in these offerings should mean that the newly public companies might be in a position to attract some decent acquisition candidates.

-- An investment in a blank check company is ultimately a bet that the management of the company will have the expertise to identify and close on the acquisition of a quality private entity. The last year has seen a significant upgrading in the management groups taking these companies public.

-- These securities are often very thinly traded. You are at the mercy of the market makers. Be very careful if you place an order.

Additional external resources

DealFlow's SPAC Newsletter

SPAC Insider (partial pay wall)

SPAC Track

SPAC Analytics

Wikipedia (Special Purpose Acquisition Company)

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3763Athena Consumer Acquisition Corp. (stock symbol: ACAQ), a SPAC that raised approGlenn Petersen-July 29
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3759Largest-ever SPAC will return $4 billion to investors after failing to complete Glenn Petersen2July 11
3758Trump leaves social media company during a federal investigation (heraldtribune.kidl-July 7
3757Another dead SPAC deal: Panera Bread terminates SPAC deal with Danny Meyer’s inGlenn Petersen1July 1
3756eToro abandons SPAC deal: The Information by Anushree Dave The Block June 30, Glenn Petersen2July 1
3755Polestar (stock symbol: PSNY) closed at $13.00 today. Polestar becomes latest eGlenn Petersen-June 24
3754GDST trading at $9.90 this afternoon, virtually unchanged. Low volume.Glenn Petersen-June 22
3753Blockchain payment company Roxe to go public via $3.6 bln SPAC deal | Reuterskidl1June 22
3752How This 80-Year-Old Female Banking Pioneer Built A Fortune On Fintech SPACs (fokidl1June 16
3751EV-Truck Startup Electric Last Mile Says It Plans to Liquidate ( The kidl1June 13
3750This SPAC is merging with an already-public company as sponsors get creative befkidl2June 10
3749Yesterday, Symbotic Inc. (stock symbol: SYM), a Walmart-backed warehouse roboticGlenn Petersen-June 9
3748Re: Bird (formerly Swithback Acquisition II) BRDS closed at $.69 yesterday. BiGlenn Petersen-June 8
3747Forbes SPAC deal on ice ( 31
3746SPACs Are Warning They May Go Bust More than two dozen companies say they may nGlenn Petersen1May 27
3745Mega-SPAC Mints a $21 Billion Fortune That Collapses in Minutes ( 25
3744nice postDarren Bailey-May 19
3743Stock Selloff Crunches SPAC Creators as They Race to Find Deals SPAC mergers haGlenn Petersen2May 18
3742Trump SPAC Deal Finally Files A Proxy: 10 Key Details We Now Know - Benzingakidl1May 17
3741Special Report: How Wall Street banks made a killing on SPAC craze By Jessica Glenn Petersen1May 15
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