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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.


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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