The Return of “Blank Check” and “Blind Pool” Stock offerings – Uh oh
I lived in Miami, Florida during a heyday of blank check offerings (sometimes called “blind pool”) in the late 1980s. In those days, South Florida was the Mecca for over-the-counter, “penny” stock scam operations. There were so many scummy penny stock brockerage houses in Boca Raton, Florida in the late 1980s that a section of South Federal Highway in town was known as “Maggot Row” or the “Maggot Mile”. In those days, brokers would cold-call senior citizens to get them to buy stock in thinly traded companies. The stock price was often manipulated by insiders engaged in frauds such as the “pump and dump”. A fairly small, but low quality part of the over-the-counter stock trade involved blank check offerings.
What is a blank-check stock? A blank check stock is a new company that is registered with the Securities and Exchange commission as a public company which has been incorporated for the purposes of acquiring other companies. The way it was explained to me in business school was that an experienced company manager raises money based on his or her reputation for identifying opportunities. The investors bet on the acumen of the organizer by putting together a pool of money for the organizer to use to attract promising private companies that need money or want to go public. The blank check company is a public shell that can absorb the going-concern private company through a “reverse merger”. It’s called a reverse merger because the smaller company absorbs the larger one. Typically, the management of the private company takes over the managment of the shell,. with the promoters and investors in the shell then becoming minority investers in the acquired company. The acquired company files a “Super 8K form” with manadatory disclosure, and will have other requirements for registration on exchanges. This disclosure is substantial, but is less than is ordinary required in a traditional public offering.
Blank check offerings have been pitched as ways for private companies to get access to venture capital, and for companies wanting to go public to do so at a reduced cost. The catch is that traditionally, things didn’t work out in the real world like they are described in corporate finance textbooks. In the past, money raised by the promoters has been looted by insiders, and insiders required under-the-table payments from the private companies to affect a merger. The stock of the resultant company was often so ummarketable as to be useless. Previously private companies found that they had all the regulations and burdens of a public company without a real working market for their stock.
After the bad days of the 1980s some new regulations were put into place, and a new breed of “SPACS” or “Special Purpose Acquisition Companies” is apparently leading the way to a revival of blank-check companies. Among the new requirements is for the proceeds raised for the acquisition to be placed in trust. That’s a good thing.
In July 2017, there was announcement that the marijuana magazine “High Times” was acquired by a SPAC called Origo (OACQ). It appears though, that in August 2018, the parties called off the merger. High Times had huge debt and comparatively small revenue, and the merger was apparently contigent on becoming valuable enough to list on NASDAQ. This seems to track what I’ve seen before, the high profile “success stories” of blank check mergers aren’t really as successful as their initial financial public relations press releases would lead one to believe. High Times then turned to raising funds through a “Reg A+” in September 2018 which Seeking Alpha called “a mess to be avoided.”
I don’t have any ties to the financial industry. I don’t work in the financial industry. I don’t advise financial companies. I have nothng to do with public offerings blank checks or companies that want to go public. I don’t want to have anything to do with the industry. I do find it interesting how things go in cycles, and sometimes not for the better.
