What Is a Blank Check Company? How They Work, Risks, and Example

What Is a Blank Check Company?

A blank check company is a publicly-traded, developmental stage company that has no established business plan. It may be used to gather funds as a startup or, more likely, it has the intent to merge or acquire another business entity. Blank check companies are speculative in nature and are bound by Securities and Exchange Commission Rule 419 to protect investors.

How a Blank Check Company Works

Blank check companies are often considered penny stocks or microcap stocks by the SEC. Therefore, the SEC imposes additional rules and requirements of these companies. For instance, they must deposit the raised funds into an escrow account until shareholders officially approve an acquisition and the business combination is made. Also, these companies are not allowed to use certain exemptions under Regulation D of the Securities Act of 1933. Rule 504 of Regulation D exempts companies from registration of securities in a 12-month period for offerings up to $10 million. The SEC prohibits blank check companies from using Rule 504.

A type of blank check company is a "special purpose acquisition company" (SPAC), which is formed to raise funds via an initial public offering (IPO) to finance a merger or acquisition within a certain time frame, typically 24 months. The money is held escrow until a combination transaction closes; if no acquisition is made after 24 months, the SPAC is dissolved and funds are returned. The SPAC managers normally hold 20% equity with the balance going to subscribers of the IPO.

As of 2020, SPACs make up about 50% of the U.S. IPO market. SPACs enjoyed a spate of popularity during the government shutdown of late 2018 and early 2019 when the SEC was unable to proceed with the review of traditional IPOs. During this period, SPACs were able to go public without the SEC’s approval or feedback, thanks to SEC regulations that allow companies to make their own IPO registration effective if they’re willing to establish a set IPO price at least 20 days before going public.

While SPACs may have gained some media attention during the extended government shutdown, these IPOs offer some risk for investors. For example, investors don’t know ahead of time what company a given SPAC will acquire, though some may give investors information regarding the sector they intend to operate in.

Example of a Blank Check Company

After a successful public relations campaign run in 2014 that informed the public that the highly popular snack cakes known as Twinkies would no longer be made, the Gores Group, a Los Angeles-based private equity firm, created blank check company Gores Holdings in 2015. The company raised $375 million in an IPO and became the vehicle that facilitated the purchase of Twinkie-maker Hostess Brands that year with other institutional investors.

Following that success, The Gores Group decided to form Gores Holdings II in 2016 "for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses," according to the S-1 filing.