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Technology Stocks
Blank Check IPOs (SPACS)
An SI Board Since January 2005
Posts SubjectMarks Bans Symbol
3645 144 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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3645Language, more than math. The numbers were always out there. Scorpion Capital weGlenn Petersen-6 hours ago
3644"beginning with a projected $161 million loss in 2021, down from the reportsense-last Friday
3643DWAC at $129.50 this morning.Glenn Petersen-last Friday
3642DWAC closed at $45.50, up $35,54 (356.83%) for the day. It up another $20.00 to Glenn Petersen-last Thursday
3641Permian Entrepreneur Hatches Shale SPAC With Billion-Dollar Ambitions Energy SPDinoNavarre-last Thursday
3640WE is trading at $11.40 this afternoon. WeWork debuts on the public markets aftGlenn Petersen-last Thursday
3639i was just headed over there. Free and easy money for the holders of the pre-revGlenn Petersen1last Thursday
3638The success or failure of this deal will not be based on financials but on politkidl-last Thursday
3637Digital World Acquisition Corp. (stock symbol: DWAC), a SPAC that raised $287.5 Glenn Petersen-last Thursday
3636It took nine months, but the Bakkt/VPC Impact Acquisition transaction has finallGlenn Petersen2October 17
3635Ginkgo Bioworks is on the forefront of a revolution, Raymond James says By GeoGlenn Petersen2October 14
3634We can buy CIFR at a nice discount today. I guess some PIPE shares unlocked on OArea51-October 13
3633Hi Glenn.... My name is Dino and I'm a recovering SPAC investor....I mean gDinoNavarre3October 8
3632Large redemptions; low float. ITAC closed at $8.20 yesterday: ARBE opened up $.5Glenn Petersen-October 8
3631Anybody seen Elon around town lately??? SPAC shareholders approve merger with IDinoNavarre-October 8
3630I just noticed large purchases of DNA yesterday (Weds) by two of Cathie's ARLabrador-October 7
3629Nice trade. Congrats.Glenn Petersen-October 6
3628Just to let you know, I sold 4,000 of the shares at $10.50. I didn't expectLabrador-October 6
3627I'm also thinking that the Company will issue a statement refuting the allegLabrador-October 6
3626Good luck. I think that there will be a bit of a bounce later today, although thGlenn Petersen-October 6
3625Just bought 4,500 shares at $9.21. So I now have 5,000 shares.Labrador1October 6
3624DNA is down almost 25% this morning. [tweet]Glenn Petersen-October 6
3623DMY Technology shareholders likely to approve IonQ merger | Seeking AlphaThehammer-September 27
3622After Early Investors Flee SPAC Deals, Day Traders Rush In Large withdrawals inGlenn Petersen2September 27
3621According to Bloomberg (the WSJ article posted below is still hesitant), Gores GGlenn Petersen1September 26
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