Blank Check

By Ramesh Akkineni
from an article in Washington Post
Blank-check companies are a kind of publicly traded buyout fund. Investors buy shares in a shell company, whose management promises to use the money to buy an operating business within 18 to 24 months. If management can't do a merger in the allotted time, it returns the IPO funds to shareholders -- minus, of course, the various investment banking and administrative fees it cost to create and operate the shell company. The initial offerings of such companies almost always includes stock warrants, the right to buy a stock at a pre-determined price. If the company can successfully buy and build a real operating business, the warrants can be extremely lucrative several years down the road.
The risks are easy to envision. First, if a blank check doesn't buy an operating company, IPO investors lose the investment banking fee and their investment funds are left fallow for as long as two years. Second, even if the blank check's management does buy an operating company, there's no guarantee it will be a successful company or a successful stock.
It's also easy to imagine a blank check's top executives siphoning investor money into their own pockets, which is why the SEC in the 1990s passed strict rules about how blank checks must be run.

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