A blank check company, also known as a special purpose acquisition company (SPAC), is a company that goes public with the purpose of acquiring or merging with another company. Unlike a traditional initial public offering (IPO), a blank check company raises money to find and acquire a target company without having any commercial operations of its own.

In essence, a blank check company is a “shell” company that allows private companies to become publicly traded faster and with less regulatory scrutiny than a traditional IPO. The blank check company sells shares and raises funds in an IPO with the sole purpose of identifying and acquiring a target company within a specific timeframe, usually 18-24 months.

A Brief History of Blank Check Companies

The concept of a blank check company has been around for decades but has seen a major resurgence in the last few years. While they’ve existed since the 1980s, blank check companies really took off in the early 1990s. The model fell out of favor after the dot-com crash but has made a strong comeback in the last decade.

In 2020 and 2021, blank check companies raised over $160 billion combined. The record-breaking trend was fueled by low-interest rates, a hot stock market, and innovative deal structures. With flexible rules and seemingly endless investor appetite, blank check companies went from a niche strategy to one of the most popular paths to going public.

How Does a Blank Check Company Work?

A blank check company follows a specific process from formation to acquisition:

Step 1: Form a New Company

Sponsors form a new corporation specifically to raise capital through an initial public offering (IPO) for the purpose of acquiring a target company. The sponsors contribute their financial expertise but initially put in little capital – often less than 5% of the amount they want to raise.

Step 2: Hold an IPO

The blank check company holds an IPO to raise a large sum of capital from public market investors. The IPO provides funding to search for, evaluate, and acquire a target business. Typically $200 million to $500 million is raised in the IPO, though some SPACs have raised over $1 billion.

Step 3: Identify and Acquire a Target

Within the specific timeframe, usually 18-24 months, the blank check company identifies and acquires a private target company. The transaction takes the target public without the time-consuming traditional IPO process.

Step 4: Complete the Business Combination

Once a target is identified, shareholders vote to approve the acquisition if they want to continue owning shares in the combined public company. If approved, the target becomes publicly traded. If declined, investors can redeem their funds before the deadline.

Unique Structure of Blank Check Companies

Unlike traditional IPOs, blank check companies have unique operating structures:

• Trust Account – IPO proceeds are placed in a trust account, kept separate to fund the future acquisition. The trust ensures investors can get a return of the IPO price per share if no deal is completed in time.
• Founder Shares – Company sponsors pay nominal amounts for up to 20% of the blank check equity, referred to as founder shares. This aligns sponsor incentives with investors.
• Sponsor Promote – If a deal succeeds, sponsors get additional shares, typically 20% of the outstanding shares post-business combination. This “promote” reward helps motivate sponsors.
• Warrants – Blank check companies issue warrants allowing investors to buy more shares at a preset price after a deal closes. This gives investors an upside if shares rise post-acquisition.
• Timeline – 18-24 month timeline forces discipline to find a deal before the trust liquidates and fund life ends. This prevents sponsors from sitting on funds indefinitely.

This unique structure heavily incentivizes sponsors to find deals and gives shareholders downside protection if no deal materializes.

The Pros and Cons of Blank Check Companies

Compared to traditional IPOs, blank check companies offer some advantages but also have drawbacks:

Benefits

• Faster timeline – Companies can access public markets and capital in months rather than the 12-18 month traditional IPO timeline.
• Certainty on valuation – Private companies can negotiate deal terms and lock in a set valuation upfront rather than relying on an IPO book-building process.
• Less regulatory scrutiny – Companies avoid the complex SEC registration and review process required for a traditional IPO. Instead, the target company leverages the SPAC’s existing SEC registration.
• Wider investor base – Going public via SPAC opens companies to a broader range of public market investors versus private funding rounds.

Drawbacks

• Dilution – The founder shares rewards and the sponsor promotes dilute shareholders of the combined company after the acquisition.
• Less oversight – Critics argue the streamlined process comes with less diligence and oversight compared to a traditional IPO roadshow.
• Limited operating history – Unlike IPO investors, SPAC investors have limited info on targets beyond deals announced shortly before closing.
• Redemption risk – If too many investors redeem funds pre-acquisition, the SPAC risks having inadequate capital to fund the deal.

While the SPAC model offers a quicker, easier path to going public, the diluted economics and limited operating history create different investor risks compared to IPOs.

What is a Sponsor Promote?

A sponsor promote refers to the additional equity that SPAC sponsors receive if they successfully complete an acquisition deal for their blank check company.

Here are some key details on SPAC sponsor promotes:

• Promotes are intended to reward and incentivize sponsors to identify strong acquisition targets and execute successful deals.
• The promote is structured as extra shares (typically common stock) issued to the sponsors after the merger closes.
• Typical promote size is 20% of the outstanding shares post-business combination, though the percentage can vary.
• Sponsors pay a nominal amount (often less than $0.01 per share) for the promote stock.
• The shares are generally subject to lock-up agreements that prevent sponsors from selling for 1-3 years post merger.
• Along with founder shares, the promote helps align sponsor incentives with regular shareholders.
• However, the promote also dilutes public shareholders as sponsors get extra equity in the combined company for minimal cost.

In summary, the sponsor promote gives SPAC creators substantial upside through cheap shares if they facilitate a successful merger or acquisition for their blank check company. But it is also a source of dilution for regular shareholders in the de-SPAC’d company.

Key Players in a Blank Check Company

Successfully executing a blank check company acquisition involves coordinated efforts between several specialized parties:

Sponsors

Sponsors assemble the blank check company and locate appropriate targets. They contribute industry expertise, investment experience, and a deal network. Well-known sponsors help attract IPO investors.

Underwriters

Investment banks underwrite the initial SPAC IPO, providing critical marketing and distribution capabilities. Banks connect SPACs to institutional investors to raise sufficient capital.

Investors

Institutional investors, hedge funds, private equity firms, and more provide the capital to fund the search for a target. Their IPO investment gets converted into shares of the acquired company.

Target Company

The acquisition target gets acquired by the SPAC, becoming publicly traded in the process. The target leverages the SPAC’s capital and financial expertise.

Advisors

SPACs use lawyers, accountants, consultants, and advisors to evaluate targets, conduct diligence, structure deals, and guide the transaction process.

Smooth coordination between these players helps blank-check companies efficiently raise funds, identify strong targets, and seamlessly execute acquisitions.

Trends and the Future of Blank Check Companies

Blank check companies saw massive growth in 2020 and 2021 but face new challenges in 2022’s unfavorable market environment:

• Shift to higher quality deals – Many early SPAC deals were speculative or unproven business models. With less appetite for riskier targets, SPACs are shifting focus to mature unicorns and companies with strong fundamentals.
• Greater regulatory scrutiny – After an explosion of deals, the SEC has proposed rules to increase disclosures and liability for SPACs to better protect investors.
• Rising redemptions – As SPAC IPO volumes surged, more investors redeemed shares pre-acquisition rather than hold through deal closure. This redemption activity forces SPACs to pursue higher quality targets.
• Declining IPO volumes – After scoring records in 2020 and 2021, blank check IPOs slowed to a trickle in 2022 as risk appetite declined. However, some sponsors argue the pullback sets the stage for a more sustainable growth trajectory long-term.

While blank check companies face headwinds in today’s environment, they have cemented themselves as a viable path to the public markets. Their ability to adapt to new market realities will determine if SPACs remain a lasting innovation or fade as a pandemic-era fad. With improved standards, they have the potential to complement traditional IPOs and fuel innovation by expanding access to public market capital.

Similarities and Differences between Blank Check Companies and SPACs

Here is a comparison of key similarities and differences between blank check companies and SPACs (special purpose acquisition companies):

Similarities:

• Blank check companies and SPACs refer to the same structure – a shell company that raises money to acquire a private operating company and take it public. The terms are often used interchangeably.
• Both follow the same process of IPO fundraising, target search and acquisition, and merger completion to create a combined public company.
• SPACs and blank check companies offer similar benefits like faster timelines, locked valuations, and investor protections like redemption rights.

Differences:

• “Blank check company” is the broader, more generic term while “SPAC” refers specifically to the structure as a special purpose acquisition company.
• “Blank check” can refer to any company formed to raise capital for undefined future acquisitions. “SPAC” always refers specifically to taking a private company public via acquisition.
• The “SPAC” term came into more prominent use in the 1990s and 2000s as this type of blank check model became more standardized.
• “Blank check” emphasizes the company’s unspecified purpose before finding a target. “SPAC” emphasizes the strategic intent to acquire operating businesses.
• In practice, “SPAC” is used more commonly today to refer to blank-check companies pursuing public market acquisitions.

In summary, blank check company is the broader umbrella term while SPAC refers to the specific application for public market acquisitions. The terms are often used interchangeably, but SPAC provides more precise terminology for this transaction structure gaining popularity today.

Key Takeaways on Blank Check Companies

• A blank check company raises funds via IPO to acquire a private target and take it public, providing a faster alternative to a traditional IPO process.
• The unique structure includes incentives like founder shares and warrants to encourage deals, alongside investor protections like redemption rights.
• Benefits include a quicker timeline, locked-in valuation, and wider investor base, while drawbacks include dilution and less oversight.
• Massive growth in 2020 and 2021 has given way to stricter standards and regulations as the SPAC market matures.
• If able to adapt to changing market conditions and refine standards, the blank check model has the potential to become a lasting option for companies pursuing a public listing.