Wall Street has never been bashful about recycling old products and concepts. One of the latest concepts to be recycled is the blank check IPO.
Over the last thirty-one months, 44 blank check companies have completed initial public offerings, raising gross proceeds in excess of $2.8 billion. Another 40 blank check companies have filed registration statements and are looking to raise an additional $3.2 billion.
As of February 24, 2006, five of the blank check companies have actually completed acquisitions, and another nine companies have deals pending. In most instances, the securities of the blank check companies that have either completed or announced deals are trading at levels that are above their original offering prices.
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 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 share 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.
The funds raised in the IPOs 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 80% of the company’s public (non-insider) shareholders. Dissenting shareholders have the option of having their shares redeemed in an amount equal to their pro rata share of the funds held in the trust account. If a transaction is not completed within an eighteen-month period, 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. Most of the 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. In most instances, as time passes and the companies approach their eighteen-month deadline, the securities begin to inch up.
The conservative way to invest in these securities would be to buy the common shares, which are generally trading at or near their liquidation value. 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. These securities are speculative. 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:
-- Most 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 being raised in these offerings should mean that the newly public companies might be in a position to attract some decent acquisition candidates.
-- The investment banks that have been taking these companies public have generally been third or fourth tier firms, though some recent offerings have been taken to market by first tier firms.
-- 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.
-- Most of these securities are listed on the OTC Bulletin Board. A few are traded on the AMEX. They are very thinly traded. You are at the mercy of the market makers. Be very careful if you place an order.
Summary information, current as of February 24, 2006:
Companies that are already public and looking for deals:
Message 22204616
Companies with deals, closed and otherwise:
Message 22204630
Companies currently in registration:
Message 22204654 |
