What Is a Blank Check Company and How Does It Work?
Explore blank check companies (SPACs) to grasp their structure, funding model, and path to taking private firms public.
A blank check company is a shell company formed to raise capital through an initial public offering (IPO) to acquire an existing private company. This structure allows the private company to become publicly traded without a traditional IPO process. These entities are commonly known as Special Purpose Acquisition Companies (SPACs).
Defining Blank Check Companies
A blank check company operates as a non-operating entity, meaning it has no commercial activities or products. Its purpose is to raise funds from public investors to merge with or acquire an unidentified private company. This acquisition typically must occur within 18 to 24 months from the IPO date.
The individuals or entity that create and manage the SPAC are known as the “sponsor.” Proceeds from the SPAC’s IPO are placed into a “trust account,” which holds the funds until an acquisition is completed or the SPAC is liquidated. This account is typically invested in short-term U.S. government securities. The term “blank check” arises because investors commit capital to the SPAC’s IPO without knowing the specific target company.
Creating a Blank Check Company
The process of forming a blank check company begins with the sponsor, who provides initial capital to cover formation and IPO expenses. This initial capital demonstrates the sponsor’s commitment. Following formation, the SPAC launches its initial public offering, issuing “units” to the public. Each unit typically consists of one share of common stock and a fraction of a warrant.
The vast majority of the capital raised from the IPO, often 90% or more, is deposited into the trust account. These funds are restricted and can only be used to complete an acquisition or be returned to investors if no acquisition occurs. Underwriting fees for the IPO are structured with a portion paid upfront and a deferred portion paid upon successful completion of a business combination. The SPAC is generally required to complete an acquisition within 18 to 24 months. If an acquisition is not completed within this period, the SPAC must liquidate and return the funds from the trust account to its public shareholders.
The Acquisition Process
After a blank check company raises funds through its IPO, the objective shifts to identifying and acquiring a suitable private operating company. The sponsor actively searches for potential target companies that align with the SPAC’s stated investment criteria. Once a potential target is identified, the SPAC conducts a thorough due diligence process, reviewing the target company’s financial statements, operations, and legal standing.
Following due diligence, the SPAC and the target company negotiate a definitive agreement for the merger. This transaction is commonly referred to as a “de-SPAC” transaction, and it effectively takes the private company public. Obtaining shareholder approval for the proposed acquisition is a critical step. The SPAC prepares and files a detailed proxy statement with the U.S. Securities and Exchange Commission (SEC), providing shareholders with comprehensive information about the proposed merger. Shareholders then vote on whether to approve the business combination, and if approved, the merger is finalized.
Investor Involvement
Investors participate by purchasing units in the SPAC’s initial public offering, which combine common stock shares with warrants. A key right for public investors is the “redemption right.” This allows investors to redeem shares for a pro-rata portion of trust account funds if they do not approve a proposed acquisition, or if the SPAC fails to complete one within the specified timeframe. This option provides downside protection, allowing investors to recover their initial investment, plus any accrued interest, from the trust account.
Warrants provide investors with a long-term equity upside. These contracts give the holder the right, but not the obligation, to purchase additional shares of the combined company at a predetermined price within a certain timeframe. Private Investment in Public Equity (PIPE) investors may also participate. These investors typically provide additional capital to the SPAC to help fund the de-SPAC transaction.