| 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 June 15, 2007, 107 blank check companies have gone public, raising gross proceeds totaling $9,238,147,833 (give or take a buck or two). Another 35 companies currently have registration statements on file with the SEC and are looking to raise an additional $3,459,920,610 (once again, give or take a buck or two). Seven other companies have pulled their registration statements, two of which subsequently went public on London’s AIM stock exchange where they raised gross proceeds totaling $381 million.
26 blank check companies have actually completed acquisitions, and another 24 companies have deals pending. Five companies have failed to close on their proposed acquisitions and are currently in liquidation.
Of the 26 blank check companies that have closed on acquisitions, 18 are trading above their offering prices, some at substantial premiums. All of the 24 companies that have deals pending are trading above their offering prices, which is not surprising when you take into consideration the fact that the non-insider shareholders will receive cash distributions if the acquisitions are not approved.
There have been two high profile transactions. The first was the acquisition of Jamba Juice Company by Services Acquisition Corporation International. The units, which were originally priced at $8.00, last traded at $13.81. The other high profile transaction is the proposed acquisition of American Apparel by Endeavor Acquisition. The units, which were originally priced at $8.00, last traded at $19.20.
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 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. 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 as of June 15, 2007
Summary notes
Message 23633381
Summary statistics
Message 23633454
Profiles of closed deals
Message 23633485
Summary information for companies with closed deals
Message 23633516
Profiles of open deals
Message 23633548
Summary information for companies with open deals
Message 23633558
Summary information for companies without deals
Message 23633582
Summary information for companies still in registration
Message 23633588
Profiles of companies being liquidated
Message 23633596
Summary information for companies in liquidation
siliconinvestor.com
Summary information for companies that have withdrawn their U.S. registration statements
Message 23633608 |
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