A:

A blank-check company is a development-stage company that either does not have an established business plan or its business plan is based around a merger or acquisition with another company or companies.

Blank-check companies generally are speculative and often fall under what the Securities and Exchange Commission (SEC) defines as "penny stocks", or speculative securities that trade for fewer than $5 per share.

A popular type of blank-check company is a special purpose acquisition corporation (SPAC). The founder of a SPAC pools money from investors and he or she may contribute to the SPAC to form a blank-check company with the sole purpose of acquiring another company or companies.

Investors do not have knowledge of how their money will be spent, so they issue blank checks to the SPAC. In turn, the SPAC must receive shareholder approval for all acquisitions and 80% of investor funds must be used in any single deal. If the SPAC fails to find a shareholder-approved deal within two years of creation, it is liquidated and the SPAC's founder loses the investment. Blank-check companies present investors with an alternative similar to private equity.

For more on this topic, read SPACs Raise Corporate Capital, Mergers and Acquisitions: Introduction and The Lowdown on Penny Stocks.

This question was answered by Richard C. Wilson.

RELATED FAQS
  1. What's the difference between a merger and an acquisition?

    Learn about the difference between mergers and acquisitions. Discover what factors may encourage a company to merge or acquire ... Read Answer >>
  2. What happens to the stock prices of two companies involved in an acquisition?

    When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. ... Read Answer >>
  3. Do penny stocks pay dividends?

    Discover whether any penny stocks offer dividends, and learn methods investors can use to identify different dividend-paying ... Read Answer >>
  4. Should I invest in penny stocks or large cap stocks for my retirement portfolio?

    Determine whether to invest in penny stocks or large-cap stocks for retirement. Penny stocks are extremely speculative while ... Read Answer >>
  5. What is the difference between a penny stock and a small cap stock?

    Learn about penny stocks and small-cap stocks, how stocks are classified as these types, and the difference between penny ... Read Answer >>
Related Articles
  1. Insurance

    Key Players In Mergers And Acquisitions

    Strategic acquisition is becoming a part of doing business. Discover the different types of investor groups involved.
  2. Investing

    The Second Return of Twinkies May Not Be So Sweet

    Twinkies are making their second comeback, this time to the public markets. Almost four years after the snack cake line's owner, Hostess Brands, declared bankruptcy following an acrimonious ...
  3. Investing

    Why Do Penny Stocks Fail?

    Penny stocks are speculative and highly risky investments. Lack of government and stock exchange oversight and general information leaves penny stock investors open to sudden losses.
  4. Small Business

    What Merger And Acquisition Firms Do

    The merger or acquisition process can be intimidating. This is why merger and acquisition firms step in to facilitate the process.
  5. Investing

    Understanding Penny Stocks' Risks and Rewards

    Penny stocks can soar in a short period, but dabbling in them is a dangerous game. Here is a breakdown on the risks and rewards of penny stocks.
  6. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller. We tell you what to look for.
  7. Investing

    The Merger: What To Do When Companies Converge

    Mergers occur when it’s beneficial for two companies to combine business operations. The question is; if you’re invested in a company that’s involved in a merger, will it benefit you?
  8. Investing

    How to Invest in Penny Stocks (ADAT, ANAD)

    Is the lure of finding a diamond in the rough too strong to ignore? Then here's a guide to investing in penny stocks.
  9. Investing

    The Lowdown On Penny Stocks

    Think penny stocks will make you rich? If you don't understand the risks, you could end up penniless.
RELATED TERMS
  1. Acquisition

    A corporate action in which a company buys most, if not all, ...
  2. Merger Mania

    A period of time with significant merger and acquisition activity ...
  3. Swap Ratio

    The ratio in which an acquiring company will offer its own shares ...
  4. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies ...
  5. Tuck-In Acquisition

    The acquisition of a company made for the sole purpose of merging ...
  6. Merger

    The combining of two or more companies, generally by offering ...
Hot Definitions
  1. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  4. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  5. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  6. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
Trading Center