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6 J. Tax'n Fin. Products 17 (2006-2007)
SPACs: A Sound Investment or Blind Leap of Faith

handle is hein.journals/jrlfin6 and id is 69 raw text is: Volume 6 Issue 2 2006 SPACs: A Sound Investment or Blind Leap of Faith?* By Bruce Rader and Shane de Bzirca The SPAC, special purpose acquisition company, is an investment vehicle that gained attention and dramatically increased in use during 2005. While this type of investment vehicle was associated with fraud and.misuse in the late 1980s, leaders in business, finance and government are now taking interest once again. The question remains though whether these renamed and revamped blank check companies are sound investments or blind leaps of faith. A special or specified purpose acquisition company 1SPAC), which has been called a mix between an initial public offering (IPO) and a re- verse merger, is a relatively new investment vehicle designed to raise capital through the public equity markets. Since January 2005, nearly 50 SPACs have filed registration statements with the SEC, compared with only 14 such filings during all of 2004, and 19 have successfully closed their IPOs.1 In fact, SPACs comprise almost 22 percent of the total number of IPO registrants in 2005.2 Despite the large number of SPAC filings and a number of completed IPOs, as of October 2005, Interna- tional Shipping Enterprises, Inc. (ISE) was the only publiclytraded SPAC to consummate a successful acquisition in 2005. Looking at all deals within the past 2 years, only three SPACs have had deals approved by their stockholders and a further five have signed acquisition agreements.' SPACs still have not gained mainstream acceptance within the financial and investment communities; and they raise numerous issues as to their investment soundness.5 This article reviews the regulatory under- pinnings of the SPAC and some issues to consider in investing in or doing business with a SPAC.6 Bruce Rader is a partner and Shane de Bfurca is an associate in the corporate practice of Chadbourne & Parke LLP in Neu- York, NY. Beth Rogers, another associate in the corporate practice, helped in preparing this article. JOURNAL OF TAXATION OF FINA',clAL PRODUCTS Regulatory Framework of SPACs A SPAC is a type of blank check company, or a newly-formed company without any business op- erations, revenues, assets, operating history, or plan of operations, formed for the express purpose of implementing a merger, asset acquisition, or similar business combination. Blank check companies have been around for years, the late 1980s was a heyday for such companies. For the years 1987 through 1990, there were approximately 2,700 blank check- type offerings for an aggregate of S9,590,000,000.7 It is unclear how much of this amount was actually raised or used to acquire new companies, but fraud became rampant as promoters only had to disclose that the company had no assets but hoped to build a business through a merger or acquisition. Because of market manipulation and fraud result- ing from some blank check companies, the SEC, NASAA, NASD and the self-regulatory organizations sought the help of Congress. As a result, the Penny Stock Reform Act of 1990 came into existence; and Section 7 of the Securities Act of 1933 (Securities Act) was amended to give the SEC power to pre- scribe special rules for blank check companies filing a registration statement under the Securities ActY Among those special rules, the SEC was specifically authorized to require such issuers to provide timely disclosure prior to and after the effectiveness of such registration statements of information regarding the company to be acquired, use of the proceeds, or any additional information to prevent the registration statement from being misleading.U Under Section 7(b) of the Securities Act, a blank check company is defined as any development stage company that is issuing a penny stock and that (1) has no specific business plan or purpose, or (2) has indicated that it business plan is to merge with an unidentified company or companies.1

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