Not All Are Risk-Averse

So-called "blank check" companies, founded by some of Wall Street's marquee names, are the hottest sector for stock offerings this year. Major stock exchanges are clamoring to list these investment shells that use their IPO proceeds to acquire other businesses.

Investing in these companies is a blind bet, whether you're a big institution or a small shareholder. Their success hinges on whether management can make deal in a specified time and the company bought is a solid investment. Some have worked, like the deal for clothing retailer American Apparel.

But let's not kid ourselves: These companies favor the executives who are running them.

The risks aren't deterring investors. Of the 19 U.S. IPOs this year, these special-purpose acquisition companies, or SPACs, account for 12 of them, raising more than $3.4 billion, according to industry tracker SPAC Analytics. In 2007, SPACs were almost a quarter of all IPOs, a dramatic rise from the one public offering for a SPAC back in 2003.

Behind some of SPACs are big name investors, like activist investor Nelson Peltz and billionaire Ronald Perelman, who is best known for owning cosmetics giant Revlon. Major investment banks such as Citigroup, Credit Suisse and Lehman Brothers are underwriting the deals.

That's raising the profile of SPACs in the marketplace. It also helps that they work like private-equity funds for the masses, giving small investors access to dealmaking that they don't generally have. SPACs also have been largely spared from the credit crisis because don't initially need to access debt to finance their acquisitions.

To get into a SPAC, investors purchase the stock at the IPO or after. Their investments are then earmarked to be used for one big acquisition that typically must be completed in about 18 to 24 months after the IPO.

Once management picks a target, shareholder approval is required. If investors vote it down, or if management can't find a suitable acquisition target, the company is dissolved and investors largely get their money back.

"Investors are taking a significant risk because they are investing in a company without any idea of what will be acquired," said Wayne State University assistant professor of law Steven Davidoff.