Why are the Special purpose acquisition companies (SPAC) or “blank check companies” (BCC) suddenly all the rage on Wall Street? Blank check companies” (BCC) have been around for decades and but they’ve recently become more prevalent because of the extreme market volatility.
What Is Blank Check Companies?
Blank check companies (BCCs) refer to publicly traded, developmental stage company firms with no specific commercial goal but to merge or acquire undisclosed private businesses to assist them to go public. 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.
How a Blank Check Company Works
- Blank check companies are often considered penny stocks or microcap stocks by the SEC. Therefore, SEC imposes additional rules and requirements of these companies.
- A blank check company, is an entity specifically set up with the objective of acquiring a firm in a particular sector.
- The aim of this blank check companies is to raise money in an IPO, and at this point in time, it does not have any operations or revenues.
- Once the money is raised from the public, it is kept in an escrow account, which can be accessed while making the acquisition.
- If the acquisition is not made within two years of the IPO, the SPAC is delisted and the money is returned to the investors.
- These are attractive to investors as the blank check companies are people sponsoring.
- It is a fresh way of thinking of how to structure and exit versus an expensive IPO. The money is already raised by somebody who specializes in that area and is now picking those assets and building on them.
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.
Few of the popular prominent figures like Shaquille O’Neal NBA player, Scott Kelly former astronaut, Paul Ryan ex-congressman, Serena Williams tennis star, Bill Ackman hedge fund billionaire, they all have a hand in SPACs (special purpose acquisition companies), one of the hottest financial trends on Wall Street.
In the last year and a half, SPACs have seen a meteoric rise as an alternate to take a private company public. By the latest tally, SPACs now outnumber traditional IPOs by a factor of 5x.
But is it good for public investors?
Why is special purpose acquisition companies (SPAC) or “blank check companies” suddenly all the rage on Wall Street, the reason being when you buy into a SPAC IPO, you almost always pay a set price of $10/share and get “warrants,” or options to buy more shares in the future at a low price.
It’s usually a leap of faith, hence the moniker “blank check company.”
Most SPACs offer little insight into the companies they plan to merge with. Investors may be told something extremely general like, “our focus will be on the technology industry in Southeast Asia or the United States.”
A SPAC filed in February 2021 uses typically vague language: “We have not selected any business combination target and we will not be limited to a particular industry or geographic region.”
