What is a Blank-Check company?

Blank-check company is development stage company without specific business plan or purpose or that has business plan to engage in a merger or acquisition with an unnamed company. These type of companies are bound by Securities and Exchange Commission Rule 419 to protect investors therefore they may be subjected to additional requirements if they are registering securities for public offering. Because SEC views them as penny stock or microcap stock there is more rules and restrictions imposed upon them. For instance blank-check companies are not allowed to use Rule 504 of regulation D that exempts companies from registration of securities for offerings up to $1 million. Companies are also required to fully disclose all terms and condition of the offering.

Popular type of blank-check company is special purpose acquisition company (SPAC), created to pull funds in order to finance merger or acquisition within certain time frame. It is publicly listed company that rises money from investors via IPO and valuation of the company is solely based on the amount of cash that is raised. Money that is raised in the process is put into escrow, meaning it is held by the third party until party obligation has been fulfilled; in this case it is identifying viable merger or acquisition opportunity. Founders of SPAC usually have 24 months to close the deal. If they don't fulfill their obligation company will be dissolved and funds will be returned to investors.

Since investors may not have the full knowledge of how their money will be spent, they issue blank check to the SPAC and in return SPAC must receive shareholders approval for acquisition and 80% of funds must be used in single deal. Some companies choose to issue blank-check preferred stock in order to raise additional funds without shareholders approval and as a defense from hostile takeover. Besides making listing process faster SPACs provide path to liquidity and access to public market for some companies.

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