A blank check company or SPAC by the acronym of its name in English (sspecial purpose acquisition company) It is one that is founded with the sole objective of raising capital to acquire a specific company or invest in a sector.
That is, this type of company is created as a vehicle to raise funds and thus buy or merge with another firm. The latter is usually a company that is not listed on the stock exchange.
Blank check companies do not carry out an economic activity. In this sense, they do not have fixed assets such as machinery, nor do they have to rent offices to develop their operations.
The appearance of SPACs responds to the need of investors, particularly high-risk ones, to be able to invest in companies that are not listed on the stock market but have high growth potential, such as startups or unicorns.
Characteristics of a blank check company (SPAC)
Among the characteristics of a blank check company (SPAC) we can highlight:
- They do not develop commercial operations.
- They are an investment vehicle, as a kind of “shell” to merge with another firm that does not have a presence on the stock market.
- The SPAC is listed on the stock exchange.
- The SPAC gathers the capital of the investors, and has a term, normally two years, to find a company that meets the characteristics sought. Then, they will buy or merge with that firm. If the purchase is not completed within the agreed term, the SPAC dissolves and returns the money raised to the investors.
- From the above, we can then deduce that the SPAC captures the funds, but does not invest immediately. This marks a difference in relation to a public offering for sale (OPV), where investors do know from the outset which company they are betting on.
- They allow investing in companies that are in an early stage of growth, since only when they reach a level of consolidation can they meet the requirements to be listed on the stock market.
- Mainly, they invest in technology companies.
- The SPAC offers less uncertainty for the company receiving the investment than an IPO. When a public offer for sale is launched, the share price can be affected by the situation of the day, for example, if there is an important announcement by the Federal Reserve System (FED). On the other hand, this does not happen with a SPAC because it has already raised capital whose value is not subject to variation.
- Another advantage for the company that merges with the SPAC is that the procedures and costs associated with the OPV are avoided.
An example of a blank check company is Social Capital Hedosophia Holdings, owned by venture capitalist Chamath Palihapitiya. He invested US$ 800 million in Virgin Galactic of the famous British businessman Richard Branson. The operation occurred in October 2019.