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.
As of February 18, 2008, 153 blank check companies have gone public, raising gross proceeds totaling $21,081,565,433 (give or take a buck or two). Another 71 companies currently have registration statements on file with the SEC and are looking to raise $12,745,120,608 (once again, give or take a buck or two). If you back out the companies that filed their initial registration statements before July 3, 2007, there are 55 companies currently in registration that are looking to raise $11,571,999,998. Ten other companies have withdrawn their registration statements, two of which subsequently went public on London’s AIM stock exchange where they raised gross proceeds totaling $381 million.
47 blank check companies have actually completed acquisitions, and another 21 companies have deals pending. Three companies have had their deals fall apart and are currently assessing their alternatives. Eight companies have failed to close on their proposed acquisitions and have either liquidated or are currently in liquidation.
There have been several high profile transactions. The first was the acquisition of Jamba Juice Company by Services Acquisition Corporation International. Freedom Acquisition Holdings recently closed on the acquisition of GLG Partners. Another prospective high profile transaction is the pending acquisition of American Apparel by Endeavor Acquisition. The shareholders of Endeavor are scheduled to vote on this transaction on December 12, 2007.
The first of the new crop of blank check companies went public on August 23, 2003.
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 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 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 to twenty-four 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. 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. 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. 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:
-- 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 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 very thinly traded. You are at the mercy of the market makers. Be very careful if you place an order.
Summary statistics
Message 24323013
Profiles of closed deals
Message 24085691
Summary information for companies with closed deals
Message 24085703
Profiles of open deals
Message 24085709
Summary information for companies with open deals
Message 24085722
Summary information for companies without deals
Message 24085738
Summary information for companies still in registration
Message 24085749
Profiles of companies that have liquidated or are being liquidated
Message 24085761
Summary information for companies that have liquidate or are being liquidated
Message 24085767
Summary information for companies that have withdrawn their U.S. registration statements
Message 24085780 |
