A blank check company is a developmental-stage company that is publicly-traded but has no established business plan or operations. These companies can be utilized to raise funds as a startup entity but are typically founded with the intent to either acquire or merge with a private company. Blank check companies are considered speculative in nature and are usually classified by the Securities and Exchange Commission (SEC) as penny stocks once they are listed.
Why Form a Blank Check Company?
Blank check companies are typically founded by investors or management-oriented groups who are seeking to bring their skills and resources to a private business with a good product or business plan but may lack funding, direction, or expertise. In some cases, the group may already have a target acquisition in mind, but it’s also common for blank check companies to form and then seek out a private company to merge with or acquire within a certain industry.
How Does a Blank Check Company Work?
Once the blank check company has been listed as a public offering, third parties can invest in it by purchasing shares. All funds received from the offering are placed into an escrow account until the company is ready to conduct a merger or acquisition.
After the blank check company has acquired or merged with a target company, the transaction is publicly announced and the blank check company is converted to the new entity. The company is then listed on stock exchanges under a new ticker symbol.
Is a SPAC a Black Check Company?
The most popular type of blank check company is a special purpose acquisition company, or SPAC. The main purpose of a SPAC is to acquire a private business and bring it public within a specific amount of time. Prior to the acquisition or merger, the SPAC raises money from investors through an IPO, with all funds placed into a trust until the SPAC has identified a target company to officially acquire or merge with.
Investors of a SPAC are typically unaware of what company it will acquire, so the money invested is seen as a “blank check.” Prior to an acquisition, the SPAC must obtain shareholder approval, with 80% of investor funds put towards the deal. Should the SPAC fail in securing a shareholder-approved deal within a certain time frame (often 24 months), the money is liquidated from the trust and returned to investors.
Insurance Needs for a Blank Check Company
After completing an acquisition or merger, company ownership should ensure its complete readiness for ongoing regulatory compliance. This often includes examining and possibly upgrading its insurance coverage, such as property insurance, tax liability insurance, cyber liability insurance, and other insurance areas, depending on the company’s business.
Woodruff Sawyer is the market leader for placing Directors and Officers (D&O) insurance for IPO companies. Woodruff Sawyer is also a nationally recognized leader when it comes to Representations and Warranties Insurance (RWI), a crucial aspect of the merger & acquisition process.
For more on Blank Check Companies:
- Blank Check Company Stocks: Learn key details about Blank Check Company Stocks and how the investment process works.
- An Update on Three of the Most Notable Blank Check Companies From 2020: Read how these companies are currently faring after their SPAC transactions were consummated.
- SPAC IPOs vs. Traditional IPOs: Discover the key differences between traditional IPOs and SPAC IPOs.
- SPAC Acquisition Process: Learn how the acquisition process works when a SPAC purchases a target company.
Learn more about what “safe harbor” is, the legal ramifications of its elimination, procedural differences, and the implications for SPAC sponsors and their targets.
The coronavirus has halted many IPO plans but SPACs (special acquisition companies) are actually gaining speed. This edition of the D&O notebook discusses how more SPACs will likely lead to more SPAC litigation.