A blank check company is a development stage company that has no specific business plan or purpose or has indicated its business plan is to engage in a merger or acquisition with an unidentified company or companies, other entity, or person. These companies are special purpose acquisition companies, or SPACs. Their goal is to raise money from public and private investors and then identify an acquisition target and buy it, typically within two years. SPACs raised more than $13.6 billion last year and could surpass that by leaps and bounds this year.
Richard Branson’s spaceship company Virgin Galactic Holdings (SPCE), fantasy-sports website DraftKings, Twinkie-maker Hostess Brands (TWNK), Electric battery maker Nikola (NKLA) and restaurant chain TGI Fridays are among the few companies to use SPACs as a vehicle to get publicly listed.
Why do some companies choose to go this route than a regular Initial Public Offering (IPO) like most other companies? The answer is to evade the scrutiny that comes during the IPO process. Poor performances and unfamiliar governance can be hidden from public view by merging with a SPAC that is already listed in the market.
Given the questionable, backdoor way to IPO, why are investors clamoring to buy the stock of these companies?
Future Wealth’s View
The short answer is it is a mistake to invest in these companies. The more shocking bit of information on these SPACs is that Goldman Sachs, Credit Suisse, Deutsche Bank, and Citigroup have all underwritten SPAC IPOs in recent years. TPG Capital, Apollo Global Management, Third Point, and Blackstone have each acted as SPAC sponsors. Somehow, through the involvement of these big institutions, the legitimacy of SPACs has spawned a move to attract the average investor who is unaware of the risks involved.
Just the knowledge that these companies have chosen not to go the typical IPO route is in itself a screaming red flag. This is akin to hiring someone who got their bachelor’s degree in one year of college vs. the typical four years. And then, there is the thorny issue of the unknown acquisitions that these companies have to do in order to stay solvent. And oh, they are thinly traded and extremely volatile as well.
Enough said, simply stay away from these blank check companies. Instead, send a check to your IRA or 401K savings account and put it in a S&P 500 index fund. Your life will be simpler and happier.