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. Why are the terms 'merger' and 'acquisition' always used together if they describe ...

    Learn about mergers and acquisitions and how these two corporate actions differ based on the size and participation of the ... Read Answer >>
  2. What is the difference between a merger and an acquisition?

    Read about the legal and practical differences between a corporate merger and corporate acquisition, two terms often used ... Read Answer >>
  3. In M&A how does an all-stock or all-cash deal affect the equity of the buying company? ...

    Mergers and acquisitions (M&A) are forms of corporate restructuring that are becoming increasingly popular in the modern ... Read Answer >>
  4. Where can I buy penny stocks?

    Discover basic information an investor needs on trading penny stocks, including where penny stocks are traded and the risks ... Read Answer >>
  5. Can you buy penny stocks in an IRA?

    Discover more about penny stocks, how they can be bought utilizing an individual retirement account and the risks penny stock ... Read Answer >>
Related Articles
  1. Investing

    SPACs Raise Corporate Capital

    These public shell companies hold many advantages over private equity. Find out more here.
  2. Stock Analysis

    Nothing Special About SPACs

    Not even an awakening IPO market can help blank-check companies.
  3. Stock Analysis

    Should You Endorse A Blank-Check Company?

    Blank-check companies are the saviors of the IPO markets. They're great for the founding shareholders, but do they make sense for the rest of us?
  4. Stock Analysis

    Five Traits Of A Great SPAC

    Special purpose acquisition companies continue to gain favor with investors. We examine the traits necessary for a good investment.
  5. Stock Analysis

    What's New In Blank Checks

    Special purpose corporation NRDC Acquisition is looking to convert from blank check to REIT, buying distressed retail properties.
  6. Fundamental Analysis

    Key Players In Mergers And Acquisitions

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

    How The Big Boys Buy

    Learn what those in-the-know look for when acquiring a company.
  8. Investing Basics

    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.
  9. Professionals

    Acquire A Career In Mergers

    This exciting sector demands a lot from its advisors. Are you up for it?
  10. Investing

    When Is A Penny Stock Not A Penny Stock Anymore?

    Although investors may shy away from them, many don’t understand that there is actually more to these misunderstood securities than one might think.
RELATED TERMS
  1. Special Purpose Acquisition Company - SPAC

    A publicly-traded buyout company that raises money in order to ...
  2. Mergers And Acquisitions - M&A

    A general term used to refer to the consolidation of companies. ...
  3. Acquisition Premium

    The difference between the estimated real value of a company ...
  4. Penny Stock

    A stock that trades at a relatively low price and market capitalization, ...
  5. SEC Form S-4

    A filing with the Securities and Exchange Commission (SEC) by ...
  6. Accretive Acquisition

    An acquisition that will increase the acquiring company's earnings ...
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center