Blank Cheque companies are also known as Special Purpose Acquisition Companies (SPACs).
SPACs are listed companies with no commercial operations that are established solely to raise capital from investors for the purpose of acquiring one or more private businesses within the next two years. Such vehicles can facilitate a smoother route to public markets for private companies by avoiding many of the regulatory hurdles that accompany the traditional initial public offering process. They can also provide investors with an avenue to access the growth and profit potential of new IPOs.
SPAC IPOs are gaining in popularity as they offer a relatively hassle-free speedy alternative to the traditional tedious procedure. From an investor perspective, there are added benefits in terms of industry expertise on selection of targets and guaranteed return in case of failure to identify a target.
A SPAC does not have to announce an acquisition for up to two years. Chances are any money invested in a SPAC will do nothing for many months. And there is always a small risk that the SPAC will return the money to its investors if it cannot complete a successful acquisition.
After the SPAC has raised the required capital through an IPO, the management team has 18 to 24 months to identify a target and complete the acquisition. The period may vary depending on the company and industry. The fair market value of the target company must be 80% or more of the SPAC’s trust assets.
Once acquired, the founders will profit from their stake in the new company, usually 20% of the common stock, while the investors receive an equity interest according to their capital contribution.
In the event that the predetermined period lapses before an acquisition is completed, the SPAC is dissolved, and the IPO proceeds held in the trust account are returned to the investors. When running the SPAC, the management team is not allowed to collect salaries until the deal is completed.
One particularly high profile SPAC to debut this year is billionaire investor Bill Ackman’s NYSE-listed vehicle, Pershing Square Tontine Holdings. This SPAC raised some $4bn from investors and has purportedly made overtures to Airbnb.