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SPAC

Background

One of the little known but potentially very profitable investment opportunities is pre-trading public companies. The most popular way for a company to become publicly traded, for many years has been “reverse mergers”. Often, companies merge into trading “shells” which unfortunately can have numerous problems due to the fact that there was a company inside which at some point failed in business. There are often inherited problems in mergers of this nature. A “419” (named for a number associated with the rules of formation according to U.S. securities rules) is a “blank check” company formed for the purpose of merging with a strong business entity with a lot of potential. In essence these are “virgin shells”. The good ones are approved and registered with the Securities and Exchange Commission. The documentation and process for doing this is expensive but necessary for the best possible results: a publicly traded company whose shares are in demand by the public.

Opportunity

There are a small number of associated investors who put together “419”s (also known as Special Purpose Acquisition Companies). Such groups are not very easy to find but if a connection can be made, these development groups offer a small number – usually 25 to 100 small investors, the opportunity of buying some shares in a new “419”. The price per share is usually very small; $.02 to .10. The reason for this is that the new company is usually more interested in shareholders than the money raised. Also, a low purchase price can mean a greater potential profit since these stocks often start out trading at several times the price of the shares. In recent years a new type of “419” has received approval from both investors and the SEC which is a much smaller and less expensive company in which the amount of capitalization can be $25,000 to $100,000. It is often suggested that the minimum purchase be $1000 (although less may be accepted) which, if the price was $.10 would provide 10,000 shares. If the stock began trading at $.50 per share and the stock was sold, there would be a 500% profit, however there are some costs involved with opening an account and getting the stock electronically transferred. It is expected that a $1000 investment could cover costs with a potentially nice profit.

Risks

There are less risks with this type of investment than might be expected since the money from share purchases is placed into a monitored escrow account (associated with a bank and/or brokerage firm). If the minimum amount is not collected, the money is sent back. In addition to this, the investors vote on the merger candidate. If they don’t like the proposed merger partner and vote against the merger, their investment is returned. The primary risk is probably the loss of the use of the investment capital during the “going public” process which can take 90 days or more (from the date of “419” approval.). The SEC also sets a limit on the amount of time for a merger to take place following the capital raise for which there is also a time limit. One of the ways of minimizing risk is in ensuring that the development group has experience and knowledge in this process.

Another risk would occur once the stock is trading, which is that there will be little interest in the stock and it would be difficult to sell the stock at a profit. Since there is little stock in the “float” (stock that is “free trading” which can be sold through the market) when a company of this type first starts trading, it is often more difficult to find sellers than buyers which can minimize this risk. An investor can certainly wait too long to sell. Other stock usually becomes tradable about 6 months after initial trading approval, so there is an opportunity to sell prior to the dilution which can come with time. There is also, the reverse of this risk which is that an investor sells too soon and misses out on a big jump in stock price.

For more information or to discuss how we can take your company public, please contact us.