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Technology Stocks
Blank Check IPOs (SPACS)
An SI Board Since January 2005
Posts SubjectMarks Bans Symbol
3616 145 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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ReplyMessage PreviewFromRecsPosted
3616h/t PV It's Now a Buyer's Market for SPACs as Deal Terms Get Sweetened Glenn Petersen-yesterday
3615The shareholders of Rotor Acquisition Corp. (stock symbol: ROT) have approved itGlenn Petersen-yesterday
3614I own shares as well. Bought into the SPAC prior to the vote.Labrador-last Friday
3613Promised Funding Means Nothing in SPAC Season of Discontent By Crystal Kim BloGlenn Petersen-last Friday
3612DNA (yesterday's SRNG) is trading at $13.60 this morning, up $2.08. As nearGlenn Petersen-last Friday
3611The shareholders of SRNG have approved the company's merger with Ginkgo BiowGlenn Petersen-last Thursday
3610Took a small position in SRNG yesterday ay $10.10. Will explain later.Glenn Petersen-last Thursday
3609EJF Acquisition Corp. (stock symbol: EJFA), a SPAC that raised $287.5 million whGlenn Petersen-last Wednesday
3608Interesting technology, not a recommendation. Investor presentation: EX-99.2 (Glenn Petersen-September 11
3607Here's the link to the investor presentation. sec.govLabrador1September 11
3606ESSC and JHD My experience with a similar Chinese company. JHD reminds me of anmacnai-September 11
3605Here's a 3D simulation that was done three years ago. It is possible that thGlenn Petersen1September 9
3604Interesting concept but boy, what an eye-sore those monstrosities would be on thLou Weed1September 8
3603Novus Capital Corporation II (stock symbol: NXU), a SPAC that raised $287.5 millGlenn Petersen-September 8
3602An interesting deal, given the success of Spotify. Not a recommendation. On MarGlenn Petersen-September 5
3601SPAC Rout Erases $75 Billion in Startup Value Shares in this once-hot sector haGlenn Petersen1September 2
3600Direct Listings Have Paid Off for Investors So Far Warby Parker and other tech Glenn Petersen2August 30
3599Could SPACs turn to SPARCs? And what are SPARCs anyway? (NYSE:PSTH) | Seeking AlThehammer1August 29
3598No sympathy for shorts - you play with fire.....Lou Weed-August 29
3597LWAC (Locust Walk Acquisition) was up $8.18 on Friday, closing at $16.98. Low flGlenn Petersen-August 29
3596Add Helbiz (stock symbol: HLBZ) to this list. The stock spiked to $25.30 after iGlenn Petersen1August 29
3595Boeing Plans Investment in Virgin Orbit’s $3.2 Billion SPAC Listing Plane makerGlenn Petersen-August 23
3594NextGen Acquisition Corp. II (stock symbol: NGCA), a SPAC that raised approximatGlenn Petersen-August 23
3593SPAC Mudrick Capital II terminates deal to take Topps trading cards public (NASDThehammer1August 20
3592Bill Ackman’s SPAC Deal Gets Messier Dealbook Newsletter New York Times August Glenn Petersen2August 20
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