What Is a Blank Check Company? How They Work, Risks, and Example

What Is a Blank Check Company?

A blank check company is a publicly-traded company without an established business plan. It may raise funds as a startup or with the intent to merge or acquire another business. Blank check companies are speculative and must adhere to Securities and Exchange Commission Rule 419 to protect investors.

Key Takeaways

• Blank check companies lack established business plans.
• They often raise funds to merge with or acquire other businesses.
• SPACs are a type of blank check company.

How a Blank Check Company Works

Blank check companies are often considered penny stocks or microcap stocks by the SEC. Therefore, the SEC imposes additional rules and requirements.

They must deposit raised funds into an escrow account until shareholders approve an acquisition and the business combination is made. Additionally, 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 registering securities in a 12-month period for offerings up to $10 million, which blank check companies are prohibited from using.

86

The number of special purpose acquisition company (SPAC) IPOs in 2022.

A "special purpose acquisition company" (SPAC), a type of blank check company, is formed to raise funds via an initial public offering (IPO) for a merger or acquisition within a certain time frame, typically 24 months. The money is held in 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 usually hold 20% equity, with the remaining going to IPO subscribers.

Blank Check Companies Falling Out of Favor

The number of SPAC IPOs in 2020 and 2021 increased significantly, reaching a record 613. However, in 2022, the number of SPAC IPOs declined due to rising interest rates, a broader slowdown of IPOs, tougher regulations, and negative media attention.

Some blank check companies have tarnished the reputation of others by creating excessive hype and not delivering on their promises. This has led to accusations of misleading investors. An additional risk is that investors are unaware of the specific company a SPAC will acquire, often only having insight into the intended sector of operation.

These controversies have resulted in numerous lawsuits. One common complaint is that SPAC executives rush through acquisitions to profit from their founder shares, which they acquired at a discount. They can sell these shares once a deal is finalized and their role is complete.

18.8%.

The average loss of shares following a SPAC IPO, according to the Congressional Research Service.

Example of a Blank Check Company

In 2015, the Gores Group, a Los Angeles-based private equity firm, created blank check company Gores Holdings. The company raised $375 million in an IPO and facilitated the purchase of Twinkie-maker Hostess Brands. Other companies Gores took public include Verra Mobility Corp. and United Wholesale Mortgage.

Gores has reduced its involvement in SPAC deals due to market conditions. In 2022, Gores Holdings VII, Gores Technology Partners, and Gores Technology Partners II were shut down.

What Are the Biggest Blank Check Companies?

As of June 2023, the biggest blank check companies based on total assets were Vertiv Holdings, Jaws Spitfire Acquisition Corporation, and Tuscan Holdings Corp., according to the Sovereign Wealth Fund Institute.

Why Is a SPAC Called Blank Check?

SPACs, or special purpose acquisition companies, are called blank check companies because they are formed without a specific acquisition target in mind.

Why Do People Invest in Blank Check Companies?

Investors are attracted to blank check companies because they offer potential growth and the opportunity to invest in private companies before they go public. However, investing in blank check companies comes with uncertainty, as the specific company to be acquired is unknown.

Why Are SPACs Riskier?

SPACs come with risks, including the uncertainty of the company being acquired and the track record of underwhelming performance in some cases.

The Bottom Line

Blank check companies are shell companies established to go public, raise funds, and acquire private companies. The number of these IPOs boomed in 2020 and 2021 but declined due to economic uncertainty, rising borrowing costs, investor caution, and increased regulatory scrutiny.

During the boom years, some SPACs gave blank check companies a bad reputation due to disappointing post-deal performance, resulting in accusations of unfair practices and high-profile lawsuits.