Blind Pool Investment Offerings
During prosperous times, potential investors tend to become less cautious in considering investment alternatives, a course of action that can have disastrous results. One type of investment instrument that lures unwary investors is the "blind pool" offering. Blind pools are investment vehicles that raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be. A common form of blind pool is the "blank check" offering. While the blind pool will usually provide at least some indication of what general industry the funds will be invested in, blank check offerings do not identify any proposed investment intent whatsoever. They are literally "blank checks" that the promoter can use at his whim.
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Sometimes, however, the promoter knows exactly what he intends to do with the money raised at the time he offers blind pool shares to the public, but chooses not to disclose his intentions for fear that prospective investors might shy away if they "knew too much." In these cases, it is only the investor who is truly blind to the use of his or her money. Strangely enough, investors readily agree to commit funds for totally unspecified purposes and with no assurance or commitments.
The Growth of Blind Pools
Blind pools are nothing new. They originated in England about 280 years ago. The first known blind pool included a statement in the prospectus offering shares "of a company for caring on an undertaking of great advantages, but nobody to know what it is." They surfaced in America during the stock market boom of the 1920s.
How They Work
Aside from the lack of information regarding use of proceeds, blind pool offerings are often characterized by an absence of proven managerial and technical expertise among the corporate officer and key employee. Given the lack of information about the funds` ultimate use, investors should be especially interested in the business background and knowledge of the promoters and officers. Nevertheless, investors in blind pools don`t seem to place much emphasis on many promoters` business background (or lack of it). Such failure to consider what are probably the key elements to success or failure in such an investment can cause regret down the road.
Blind pools are often undercapitalized, having virtually no assets other than the other money obtained through the offering itself. This lack of funding is especially critical since the primary purpose of many blind pools is to raise funds to acquire a private firm that wants to go public without going through the usual regulatory steps. A private firm can arrange to be taken over by a blind pool company in a "reverse acquisition" (that is, the private company is the surviving entity) thus becoming public without the intense scrutiny and delay associated with underwriting and SEC and/or state registration.
These actions often result in a significantly increased stock price for the blind pool investors immediately after the acquisition. However, frequently inadequate capital, lack of management skills and an overvaluation of the stock will quickly serve to drive down the price. The original promoters, who received their shares at prices far lower than the public investors paid, can tell their interests immediately after an acquisition when the price is high, leaving the investors to fend for themselves.
Many investors, of course, don`t bother to carefully to read a prospectus in their haste to invest. This is a big mistake. Any potential investor must not disregard risk factors and operational details mentioned in the prospectus.
Although many blind pool prospectuses may disclose that the pool cannot afford to buy another company, it will be quick to point out that there are many small, private companies that are anxious to go public and one of them will acquire this blind pool. The truth is, these reverse acquisitions rarely occur, and when they do the financial position of the newly public company can rarely sustain the overinflated price of the stock. Very few blind pools are truly successful. The real winners in the pool are usually their underwriters, attorneys, and promoters, not the investors themselves.
A final characteristic of blind pools is that stocks are usually offered at low prices, often under five dollars a share. They are frequently sold by stock brokers and brokerage houses that specialize in selling low priced "penny stocks" although, in some instances, the promoters of the blind pools sell shares directly to investors without going through a registered broker/dealer. Some promoters have used high pressure "boiler room" telephone sales tactics to sell shares in their pools. The low stock prices lure investors into a totally speculative ventures because they don`t feel they have to risk a lot of money to participate.
Unfortunately, if these investments are mismanaged and the investors lose their money, the victims don`t usually complain, thinking that the losses would not justify the cost of suing the promoters. Investors tend simply to absorb losses and do not bother to complain to regulatory authorities about the fraud or misuse. Often in the past as a result of limited resources, regulators did not give high priority to blind pools. Their relative insignificance in the investment marketplace and the lack of public complaints had fostered this policy.
: Regulatory Trends
While some states securities laws and regulations preclude the registration and sale of blind pools, their regulation by some state and federal agencies traditionally has not been given much attention. However, as blind pools have proliferated the state and federal authorities appear to be clamping down.
In Utah, for examples, where blank checks were said to "roam the land in herds" the state securities division issued a regulation in 1986 to combat abuses. The ruling requires blank check offerings to keep 80 percent of the initial proceeds of the offering in an escrow account until the promoter declares what business they will be entering into. At that time, they will be required to offer shareholders a opportunity to back out of the investment or, given full disclosure about the intended use of proceeds the right to continue their investment. No stock certificates will be issued until that point, and thus the shareholders are locked into their purchase until the time. Since the regulation went into effect, the number of filing for blind pool registrations has dropped drastically.
Florida also passed legislation in 1986 that affects all shares issued at less than five dollars per share that are not traded on a recognized stock exchange such as the New York or American Stock Exchanges. These new issues are subjected to a fairness standard of review. Since many blind pool offerings are priced below five dollars a share and will never be traded on a nationally recognized exchange, they will be subject to review. Also, any offering where the issuer has committed any "Reportable acts" within the past ten years will be subject to merit review. "Reportable acts" include bankruptcy, conviction of a criminal act, and security or commodity violations. This provision will allow further scrutiny of additional questionable offering since many times, blind pool promoters have prior records of disciplinary action.
:How to Avoid a Bad Investment
Before making any investment, always fully read the prospectus. Make sure you know the background of the promoters and officers. Carefully read the "risk factors" section in the prospectus. A key question to check out is whether the promoter made a substantial investment in the entity. In other words, is he putting his money at risk as he is asking investors to risk theirs? Just because a promoter owns a big block of shares doesn`t mean he paid a significant amount of money for them. Remember that all oral statements about the company may be nothing more than a hype to get you to invest.
Don't allow yourself to be pressured in a quick decision. If the promoter wants your decision now, your answer should probably be "no." Allow enough time to have the offering reviewed by your attorney, accountant or investment counselor.
After you have carefully read the prospectus and understand all the information, consider other investment alternatives. Can you get the same return on your investment with less risk? As with any speculative investment ask yourself if you can afford to lose your money? Does the return sound too high compared to other investments? Remember, if it sounds too good to be true, it probably is.
For More Information
The securities administrators in your state, province, or territory are responsible for the protection of investors by insuring that complete information is available for many types of investments. If you have questions about a blind pool investment, contact your local administrator first. Your prompt action could save you money.
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