What Is the Difference Between Shell Companies and Blank Check Companies?
Shell companies and blank checks are basically similar. But there are clear distinctions that set each apart. A start-up company that has a plan to produce or provide “something” but currently has no operations would qualify, if or once it becomes a public and reporting company, as a shell company because it has nominal/minimal assets and operations. However, since it has a genuine business plan, it would not qualify as a blank check. On the other hand, an inactive company that used to have operations but has a good deal of assets (such as patents, third-party claims, or maybe even a significant net operating loss carryforward) could qualify as a blank check (because its real intention is to merge) but not a shell company (because it maintains more than nominal/minimal assets).
A start-up that has some operations is not a shell company. However, it would still be subject to the disclosure requirements upon any reverse merger if it still maintains nominal assets and operations.
Blank Check Company
REVIEWED BY GORDON SCOTT, CMT Updated Sep 15, 2019
What Is a Blank Check Company?
A blank check company is a publicly-traded, developmental stage company that has no established business plan. It may be used to gather funds as a startup or, more likely, it has the intent to merge or acquire another business entity. Blank check companies are speculative in nature and are bound by Securities and Exchange Commission Rule 419 to protect investors.
KEY TAKEAWAYS
Blank check companies do not have established business plans.
This type of company is often used to gain funds, with the plan to merge with or acquire another business.
SPACs are a type of blank check company.
How a Blank Check Company Works
Blank check companies are often considered penny stocks or microcap stocks by the SEC. Therefore, the SEC imposes additional rules and requirements of these companies. For instance, they must deposit the raised funds into an escrow account until shareholders officially approve an acquisition and the business combination is made. Also, these companies are not allowed to use certain exemptions under Regulation D of the Securities Act of 1933. Rule 504 of Regulation D exempts companies from registration of securities for offerings up to $1 million. The SEC prohibits blank check companies from using Rule 504.
