What Is a Blank-Check Company?

A blank-check company is a development-stage company that either does not have an established business plan or its business plan is based around a merger or acquisition with another company or companies. Blank-check companies generally are speculative in nature and often fall under what the Securities and Exchange Commission (SEC) defines as "penny stocks," or speculative securities that trade for less than $5 per share.

In an effort to raise capital or finance future operations, a blank-check company may choose to issue penny stocks to investors. Blank-check companies present investors with an alternative similar to private equity. 

All blank-check companies are required by the SEC to place all funds received from the offering into an escrow account. The companies are also required to fully disclose all terms and conditions of the offering.

A popular type of blank-check company is a special purpose acquisition corporation (SPAC). The founder of a SPAC pools money from investors and he or she may contribute to the SPAC to form a blank-check company with the sole purpose of acquiring another company—or companies. The money raised through the IPO of a SPAC is put into a trust. The funds are held until the SPAC successfully identifies a viable merger or acquisition opportunity to pursue with the invested funds.

Investors may not have full knowledge of how their money will be spent, so they issue blank checks to the SPAC. In turn, the SPAC must receive shareholder approval for all acquisitions and 80% of investor funds must be used in any single deal. If the SPAC fails to find a shareholder-approved deal within two years of creation, it is liquidated and the SPAC's founder loses the investment.

Some companies may issue blank-check preferred stock as a way to raise additional funds from investors without the need to first seek and obtain approval from shareholders. In order to create blank-check preferred stocks, the company is required to amend its articles of incorporation to allow for the creation of a class of unissued preferred stock. 

In some cases, a public company may choose to issue blank-check preferred stocks as a form of defense against a potentially hostile takeover bid. (See also: SPACs Raise Corporate Capital, Mergers and Acquisitions: Introduction and The Lowdown on Penny Stocks.)

This question was answered by Richard C. Wilson.