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SPAC: The History of the Form, from Penny Stocks and Blank Check Offerings (Part II of IV)

Editor’s Note: This blog series is presented in four parts. This second installment provides a background on the history of special purpose acquisition companies.


The SPAC form had its beginning in a turbulent time for capital markets in the United States. Its earliest predecessor was a type of public offering commonly referred to as a “blank-check” company. In their heyday, these listings were used extensively as a means to bilk investors of their money. This fraud took place, most often, in the segment of capital markets were penny stocks are traded.


The 1980’s were a time of explosive growth in capital markets.1 As might be expected, along with this growth came a similar increase in fraudulent activity.2 This was especially true in the obscure niche-market for penny stocks.3 By the end of the 1980’s the Securities and Exchange Commission (SEC) was reporting that of all substantive broker-dealer complaints received, 22% regarded penny stock firms.4 The significance of this figure can be truly appreciated by considering that less than 5% of total registered broker-dealers in the United States, were firms whose primary business was the sale of penny stocks.5 At the time, a former Securities and Exchange Commission Chairman, David Ruder, called penny stock fraud “one of the most menacing problems facing investors, regulators, and the legitimate securities industry”6 By the 1990s, it was estimated that penny stock fraud was costing investors at least $2 billion per year.7


One substantial component of the penny stock market in the 1980s, was indeed the use of “blank check” offerings. These are securities offerings (like Silver Run) in which the issuer discloses no specific business plan or purpose, no assets, and no liabilities, but goes public anyways.8 Essentially, collecting money from investors without any idea how it would be spent. By the end of the 1980s this type of offering was pervasive in the penny stock sector. According to the North American Securities Administrators Association, nearly 70% of all penny stock issues from 1988 through the third quarter of 1989 were these “blank checks”.9 To many, this was not seen as a good thing. At the time, a U.S. Attorney for the District of Utah testified before Congress: “We find no evidence that these offerings provide any benefit to the U.S. economy or capital formation.”10 In fact, this type of offering was often accompanied by fraud.


In the prototypical blank check fraud scheme, the promoters of the blank check offering will register the blank check entity with the SEC. They will then distribute the stock of the company to their underwriting broker, business associates, and friends. At that point the promoter and their accomplices will attempt to offload the stock, at a large mark-up, to unwary investors. They will do this by either merging with a private company (one in which they can convince investors of a bright future), or create the mere rumor of a merger. At the same time they may utilize high-pressure sales tactics to sell the shares to the retail public, or trade the shares back and forth between cooperating firms to create the appearance of liquidity. This is exactly the type of activity made infamous in such films as 2000s “Boiler Room” and the 2013 Oscar-nominated “The Wolf of wall Street”. The promoter’s goal in this scheme is simply to find any way to artificially manipulate the price of the blank check company upward as he offloads his ownership.11


It was against this backdrop, and these kinds of practices, that Congress enacted the Penny Stock Reform Act of 1990 (PSRA). The act took a number of steps to reign in the fraudulent activities in the penny stock arena, but addressed blank check offering directly in Section 508.12 Primarily (although not the only operating provision of the Act), the PSRA limits the use of proceeds from “blank check” IPOs until disclosures are made regarding the company to be acquired.13 This was a large step towards regulating the practice of “blank check” companies, but was not effectual on its own.


In response to the PSRA, the SEC adopted Rule 419 in 1992.14 This new rule would require most of the proceeds of a blank check IPO to be placed in an escrow account until a merger with an operating company is completed.15 In order for the funds to be released from escrow, the blank check company would have to, first, agree to acquire a business the fair value of which is at least 80 percent of the funds raised in the IPO.16 Second, the blank check company must allow investors to reconfirm their desire to invest in the blank check company in light of the proposed merger.17 Third, the promoters must complete a merger within eighteen months of the blank check company’s IPO.18 This rule had the desired effect of driving away the majority of scam artists residing in the penny stock market, as the IPO funds could no longer be spent by them personally.19 Under these new provisions, the use of blank check companies largely retreated from public markets by the late 1990s.20 Indeed, Rule 419 is often credited as a substantial cause of this.21


Because not all blank check offerings were the subject of fraud, their departure left a void in capital markets. As the economy grew in the 1990s, small companies themselves also experienced growth.22 Many of these companies continued to have a need for access to public markets, but were not good candidates for traditional IPOs.23 Recognizing this void, David Nussbaum, the Chairman of GKN Securities, sought to reintroduce blank check companies and their use in reverse mergers.24 Thus, he began creating the first instances of SPACs.25


As it turned out, the blank check companies Nussbaum wanted to create would be altogether exempt from Rule 419, which only applies to securities offerings of less than $5 million.26 Nonetheless, in order to attract investors to the once seedy corner of the marketplace, Nussbaum voluntarily complied with many of the operating provisions of Rule 419.27 For example, he would place a large percentage of the IPO proceeds in escrow, give managers a time limit to find a merger partner, and give the investor the right of rescission (the right to decide whether they wanted to stay invested given the proposal of a merger candidate).28 The result was that a once derided marketplace niche, occupied by penny stock fraudsters, was now structured around specific requirements that made fraud much more difficult, and thus provided some measure of dependability to potential investors.


This first wave of SPACs in the 1990s was short lived, as the tech-boom of that decade made the traditional IPO process both relatively easy and extremely beneficial for small companies.29 The tech boom would not last, however, and the use of these SPACs saw a second wave of resurgence in the new millennium. According to one source, although there was just one SPAC public offering in 2003, that number would grow to sixty-six by 2007.30 This second wave was spurred largely by investment banks, which came to see the potential for SPACs as a significant source of underwriting revenue.31 Today, in fact, nearly all of the largest investment banks participate in the SPAC market.32


This second generation of SPACs gained added legitimization when, in 2008, Nasdaq Stock Market, Inc. (“Nasdaq”) and the New York Stock Exchange (“NYSE”) announced that they would change their rules to allow SPACs to be listed for the first time.33 This decision was largely predicated on the huge surge in SPAC activity. From 2006 to 2007 the total proceeds from SPAC IPOs climbed from $2.719 billion to $10.674 billion.34 This second wave would also not last, however, as the recession of 2008 led to there being no SPAC offerings in either 2009, 2010, or 2011.35


In yet another show of resiliency, SPACs have begun to reemerge. In fact, in 2015 the form made up 11% of total IPOs (up from just 4% in each of the prior two years).36 Although the market has yet to reach the same heights it saw in 2007, it has indeed become an important part of capital markets. It is therefore worthwhile to take a hard look at how these transactions occur, why they are being increasingly utilized, and what benefit they might provide.


  1. See S. Rep. No. 101-337, at 2 (1990), available at 1990 WL 263550 (“[B]etween 1980 and 1989, the number of securities firms increased approximately 90 percent; the number of investment companies grew more than 145 percent, the number of investment advisers more than tripled, the number of registration statements filed annually with the SEC doubled, and the number of tender offer filings increased over 670 percent. SEC staff levels increased only slightly during this period”). See also John V . Duca, The Democratization of America’s Capital Markets, Fed. Reserve Bank of Dall. (2001), at 13 (“Between the mid-1970s and late 1990s, household portfolios changed greatly as the share of household financial assets in bank deposits fell, while that in mutual funds and securities jumped from 22 percent in 1975 to 42 percent in 1999. To a large extent, this shift stemmed from several innovations that lowered the cost of investing and broadened the menu of investments. These include the rise of money market mutual funds, the advent of Individual Retirement Accounts (IRAs), and declines in transaction costs.”). 

  2. See S. Rep. No. 101-337. 

  3. Gregory A. Robb, Fraud Cited in Penny Stocks, N.Y. Times, Sep. 7, 1989. See, e.g., U.S. Sec. and Exch. Comm’n, Penny Stock Rules (May 9, 2013),, (“The term “penny stock” generally refers to a security issued by a very small company that trades at less than $5 per share.”). 

  4. H.R. Rep. No. 101-617, at 1412. 

  5. Id

  6. Securities Enforcement Remedies and Penny Stock Reform Act of 1990: Hearing on H.R. 4497 Before the S. Comm. On Tel. and Fin., 101st Cong. 7-8 (1989) (statement of David S. Ruder, Former U.S. Sec. and Exch. Comm’r). 

  7. See Gregory A. Robb, Fraud Cited in Penny Stocks, N.Y. Times, Sept. 7, 1985, at D5. 

  8. H.R. Rep. No. 101-617, at 1424. 

  9. Id

  10. Id. 

  11. Id. 

  12. 15 U.S.C.A. § 508 (Westlaw through Pub. L. No. 101-429). 

  13. 7 Bromberg & Lowenfels on Securities Fraud § 13:143 (2d ed. 

  14. Offerings by Blank Check Companies 17 C.F.R. § 230.419 (2014). 

  15. Id. § (b)(1). 

  16. Id. § (e)(1). 

  17. Id. § (e)(2)(ii). 

  18. Id. § (e)(2)(iv). 

  19. See David N. Feldman, Reverse Mergers: Taking a Company Public Without an IPO 44 (Janet Coleman ed., Bloomberg Press) (2006). 

  20. Id. at 45 

  21. Id. 

  22. See Feldman, supra note 23, at 180 (“[C]ompanies were growing to the point where being public could provide some benefit. Yet they had no way to get there through traditional means.”). 

  23. See Id. at 180. 

  24. See Id. 

  25. See Id. at 181. 

  26. See Definition of “Penny Stock,” 17 C.F.R. §240.3a51-1 (1992) (exempting issuers who are registered on an exchange which has listing standards that require at least $5 million of stockholders equity). 

  27. Feldman, supra note 23, at 180 

  28. See Id. at 181 (“So, even though the SEC did not require it, his SPACs (as he started

    calling them) put all the money raised in escrow, except a small percentage for operating expenses and commissions paid to the investment bankers. They required investor reconfirmation with a full disclosure document approved by the SEC. They put a time limit on finding a merger partner, but they allowed more time than Rule 419, up to two years instead of eighteen months to close a merger. But, most important, Nussbaum arranged for a trading market for the stock of the SPAC, as well as for warrants sold to investors in the IPO. This would not be permitted in a 419 shell that did not raise at least $5 million.”). 

  29. See Id. at 946 (“As the IPO market began to heat up during the tech boom of the mid-1990s, smaller companies were increasingly successful in raising funds using traditional IPOs. As a result, the need for SPACs, which provided smaller companies access to the capital markets through alternative means, was obviated”). 

  30. See Fundamental Analysis, SPACAnalytics, (last visited Mar. 12, 2015). 

  31. See Daniel S. Reimer, Special Purpose Acquisition Companies: Spic and Span, or Blank Check Redux?, 85 Wash. U. L. Rev. 931 (2007). 

  32. Lynn Cowan, Goldman Writes out ‘Blank Check’, Wall St. J., Mar. 26, 2008, at C3 (“As the only major U.S. investment bank that hasn’t underwritten a blank-check initial public offering in the past three years, Goldman Sachs’s entry into the segment adds legitimacy to a structure that was considered suspect by much of Wall Street until about 2005”). 

  33. See Id. Up to that point blank check companies had been traded on over-the-counter markets. 

  34. Renaissance Capital, Cracks in the market bring SPACs to the market: Fun facts about SPACs, (Feb. 26, 2016), 

  35. Id

  36. Id