Not Guilty by Association: Why the Taint of Their "Blank Check" Predecessors Should Not Stunt the Growth of Modern Special Purpose Acquisition Companies

Abstract

During the 1980s, "blank check" companies were prominent vehicles for fraud and abuse in the penny stock market. These companies largely disappeared as a result of regulatory backlash in the 1990s, but a new type of company with a similar structure has taken their place in the securities market: the Special Purpose Acquisition Company ("SPAC"). Much like their blank check predecessors, SPACs have no operations; they merely issue securities with the intent of using the proceeds for merging with or acquiring another company. Although SPACs have enjoyed increased prominence in the market, regulators continue to view them with considerable skepticism. In addition to promulgating regulations forcing SPACs to disclose more information to potential investors, the Securities and Exchange Commission deliberately moves slowly in processing SPAC deals, with the hope of curbing the pace of SPAC offerings. This Note argues that continuing to treat SPACs similarly to the blank check companies of the 1980s is a misguided strategy because the characteristics of the two, once one looks beyond their basic structure, differ significantly. This Note also emphasizes that SPACs may be the only method of raising capital for smaller emerging companies. It thus concludes that any efforts to thwart the SPAC structure itself reflect an erroneous attempt to protect investors, at the expense of allowing this latest Wall Street innovation to facilitate capital formation.