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The Blank Check Problem

How SPACs Became a Tool of Circumvention — and How to Realign Them

Explain It Like I’m Five

Imagine you give someone your piggy bank money because they promise they’ll go buy something good with it — but they won’t tell you what they’re buying until after they already spent it. They also get to keep 20% of whatever they buy, even if it turns out to be junk. If you don’t like what they picked, you can technically ask for your money back, but the rules make it really hard. And then they might rename the thing they bought, move it to a different country, and change its name again — so nobody can trace what happened to your money. That’s a SPAC. The people who set it up almost always win, and the regular people who put money in almost always lose. This was supposed to be illegal after the last time it ruined people’s lives in the 1980s, but it was restructured to get around the law that stopped it.

I. What Is a Blank Check Company?

A Special Purpose Acquisition Company, or SPAC, is a shell corporation that raises money through an initial public offering (IPO) with no actual business operations, no products, and no revenue. It exists for one purpose: to merge with or acquire a private company at some point in the future, thereby taking that private company public without the private company having to go through the full IPO process itself.[1][2]

The term blank check company is not incidental branding. It is the SEC’s own regulatory classification for an entity that has no specific business plan and exists solely to merge with an unidentified future target. The Penny Stock Reform Act of 1990 specifically targeted these vehicles after a decade of rampant fraud in which blank check companies were used to scam retail investors through pump-and-dump schemes.[3][4] Between 1987 and 1990, approximately 2,700 blank check companies went public. In the equivalent period after the law passed, fewer than fifteen did.[5]

The modern SPAC evolved in the 1990s as a deliberate structural workaround to avoid the blank check company regulations Congress had just enacted. The mechanism was elegant in its cynicism: SEC Rule 419, the regulation designed to control blank check companies, only applied to issuers of penny stocks — securities trading below five dollars. Early SPAC architects priced their IPO units at ten dollars per share, thereby falling outside Rule 419’s definition of a blank check company entirely. They were, functionally, the same instrument. They were, legally, something else.[5][6]

The Core Distinction

A traditional IPO requires a company to disclose its financials, prove its business model, survive rigorous underwriting, and submit to extensive SEC review before it can access public investor capital. A SPAC reverses this process: it collects the money first, then decides what to do with it. This is the definitional structure of the blank check company that Congress regulated in 1990 — repackaged above the penny stock threshold.

II. How SPACs Work

A SPAC’s lifecycle has three distinct phases, each of which introduces layers of structural advantage for the people who set it up (called sponsors) and structural disadvantage for the public investors whose capital funds the entire operation.

Phase 1: Formation and IPO

A sponsor — typically a private equity firm, hedge fund manager, or serial dealmaker — creates a shell corporation. The sponsor contributes a nominal amount of capital (often around $25,000) and receives approximately 20% of the post-IPO equity in the company. This 20% stake is called the promote or “founder shares.” The SPAC then conducts an IPO, selling units at $10 each. Each unit typically includes one share of common stock and a fraction of a warrant (an option to buy additional shares later at a fixed price). The IPO proceeds are placed in a trust account.[2][7]

Phase 2: Target Search and De-SPAC

The SPAC has a limited window — typically 18 to 24 months — to identify and merge with a private company. This merger is called a de-SPAC transaction. During this period, the sponsor team searches for a target, negotiates terms, and presents the proposed merger to shareholders for a vote. Shareholders who do not approve of the selected target can redeem their shares and receive approximately $10 back (plus accrued interest). If no merger is completed within the deadline, the SPAC is supposed to liquidate and return funds to investors.[2][8]

Phase 3: Post-Merger

Once the merger is completed, the SPAC ceases to exist as a separate entity. The combined company typically takes the name of the acquired business, receives a new ticker symbol, and begins trading as a public company. The sponsor retains their 20% promote stake. Warrants become exercisable. And the entity that investors originally bought into — the SPAC itself — functionally disappears from the public record, replaced by a new name, new filings, and often a new jurisdiction of incorporation.

The Incentive Problem

The sponsor’s 20% promote has value only if a merger is completed. If the SPAC liquidates without a deal, the sponsor’s shares are worthless. This creates a powerful incentive for sponsors to complete any deal — not the best deal. As Stanford law professor Michael Klausner and his co-authors documented, this structural misalignment means that sponsors profit handsomely even when their investors suffer steep post-merger losses.[7][9]

III. Why This Structure Is Ethically Indefensible

The ethical case against SPACs does not rest on edge cases or bad actors. It rests on the structure itself — the incentives baked into the instrument by design.

Structural Wealth Transfer from Public to Private

The SPAC structure is, at its core, a mechanism for transferring wealth from public investors to private sponsors. The sponsor contributes a nominal amount and receives 20% of the equity. Public investors contribute 100% of the capital and receive roughly 80% of the equity — before accounting for further dilution from warrants, PIPE (Private Investment in Public Equity) investors, and redemptions by early institutional shareholders.[7][10] Stanford’s Klausner estimated that by the time a SPAC merges, the company may only receive approximately 50% of the cash that investors originally put in, with the rest consumed by sponsor promotes, underwriting fees, and dilution.[9]

Catastrophic Investor Performance

The performance data is not ambiguous. Over 90% of de-SPAC companies trade below their $10 IPO price after merging. Mergers completed in 2021 and 2022 lost an average of 67% and 59% of their value, respectively. SPAC returns were below overall market returns every single year measured. At the peak of the SPAC frenzy in 2021, SPACs accounted for 63% of all IPOs, and cumulative de-SPAC value destruction reached hundreds of billions of dollars.[11][12][13]

Retail Investors Bear the Losses

The initial IPO subscribers to SPACs are overwhelmingly institutional investors who understand the mechanics and plan to exit before or at the time of the merger. They earn attractive returns (averaging around 24% annualized) because they can redeem at $10 and keep their warrants regardless. The investors who buy shares after the IPO or who hold through the merger — disproportionately retail investors — are the ones who absorb the losses from dilution and poor target performance.[7][14][15] Columbia Law School’s CLS Blue Sky Blog characterized SPACs plainly: retail investors are at the bottom of the pile, making SPACs “a retail investor’s worst nightmare.”[15]

Circumvention of Disclosure Protections

A key selling point of SPACs for target companies is that the de-SPAC process requires fewer regulatory filings and has fewer safeguards for investors than a traditional IPO. Until the SEC’s 2024 final rules, SPACs could make forward-looking projections protected by the Private Securities Litigation Reform Act’s safe harbor — a protection unavailable to companies conducting traditional IPOs. This allowed SPAC targets, particularly pre-revenue startups, to market themselves on wildly optimistic projections with legal protection that conventional IPO issuers did not enjoy.[1][8][16]

• • •

IV. The Traceability Problem: How Mergers Erase the Trail

Beyond the structural wealth transfer and investor harm, SPACs create a specific and severe accountability problem: the de-SPAC process makes ownership, registration, and transaction history extraordinarily difficult to trace. This is not an accidental byproduct. It is a feature of the instrument’s design.

Name Changes Sever Documentary Continuity

When a SPAC merges with its target, the resulting entity typically takes the target company’s name and receives a new ticker symbol. The SPAC that conducted the IPO — the entity that was the subject of the original registration statement, trust agreement, and shareholder disclosures — simply stops existing under that name. SEC filings continue under a new CIK (Central Index Key) or are transferred, but the practical effect for anyone researching the transaction history from the outside is a broken chain of custody. If the post-merger entity then changes its name again (through rebranding, further acquisition, or restructuring), another link is severed.

Jurisdictional Arbitrage

SPACs routinely incorporate in offshore jurisdictions — the Cayman Islands and British Virgin Islands are the most common — to take advantage of tax neutrality, reduced regulatory requirements, and flexible company law frameworks. When the de-SPAC transaction occurs, the entity may redomicile (legally move its jurisdiction of incorporation) to a U.S. state like Delaware or Nevada. This creates a situation where the entity that raised money from investors was incorporated in one jurisdiction under one set of laws, but the entity that now holds the acquired business exists in a different jurisdiction under different laws.[17][18][19]

This is not an accident of logistics. Legal practitioners openly describe the “ability to redomicile to another jurisdiction if required at a later stage” as an advantage of offshore incorporation for SPACs.[18] The choice of jurisdiction is frequently described as being “led by tax decisions” — not by investor protection considerations, regulatory accountability, or transparency.[17]

The Shell Within a Shell Problem

A SPAC is already a shell company. When a SPAC merges with a target, the resulting entity may itself establish subsidiary structures across multiple jurisdictions. The practical effect is layers of corporate entities nested inside one another, each registered in a different place, each with its own set of filings (or, in many offshore jurisdictions, minimal filing requirements), and each creating additional distance between the original investors’ capital and wherever it ultimately ends up. Tracing beneficial ownership through this structure requires navigating corporate registries across multiple countries, each with its own disclosure standards.

The “De-SPAC Tracker” Gap

SPAC tracking services explicitly note that once a merger is completed, they stop tracking the management teams and sponsor structures of the resulting entity.[20] This means the institutional memory of who was involved in structuring the deal, what their conflicts of interest were, and how the transition of capital occurred is maintained only in SEC filings — filings that may be under a different entity name, a different CIK, and potentially even a different jurisdiction than where the original transaction was documented. For researchers, journalists, and regulators attempting to reconstruct the chain of events after the fact, this is a significant documentary gap.

The Practical Effect

Consider the lifecycle of a single SPAC: it is incorporated in the Cayman Islands under Name A, conducts its IPO on NASDAQ under ticker AAAA, identifies a target company in the United States, redomiciles to Delaware, merges with the target, takes the target’s Name B, receives new ticker BBBB, and the original Cayman entity is de-registered. Two years later, the company rebrands and becomes Name C. An outside researcher starting from Name C has to work backward through at least three name changes, two jurisdictions, and a de-registered offshore entity to reconstruct the SPAC’s origin and the flow of investor capital. The filing trail exists — but assembling it requires expertise, access, and persistence that most retail investors and many journalists do not have.

V. A System Aligned with Circumvention

The SPAC structure does not exist because it serves a necessary market function that could not be accomplished by other means. Companies can go public through traditional IPOs, direct listings, or Regulation A+ offerings. The SPAC exists because it allows sponsors, target companies, and their advisors to accomplish specific things that the traditional process was designed to prevent.

The current system is aligned with circumvention in several compounding ways.

The Penny Stock Loophole Was Never Closed

The entire SPAC industry rests on a definitional exploit: Congress defined “blank check company” in a way that was tied to the definition of “penny stock.” SPAC architects priced their offerings above the penny stock threshold, thereby avoiding the regulations Congress wrote specifically to stop the thing SPACs do. The SEC itself acknowledged this history in its 2024 rulemaking release, noting that “SPACs first began to emerge in the 1990s as an alternative to blank check companies after blank check companies began to be regulated more strictly pursuant to Rule 419.”[6] This is the regulator itself documenting that the instrument was designed to work around the regulation.

Voluntary Compliance Replaced Mandatory Compliance

Early SPACs voluntarily adopted some of Rule 419’s investor protections — trust accounts, shareholder redemption rights — to attract investor confidence while being legally exempt from Rule 419 itself. This created the illusion of comparable protection. But voluntary compliance can be modified, watered down, or abandoned at any time. The protections that exist in SPACs are not the protections that Rule 419 mandated; they are negotiated approximations of those protections, implemented at the sponsor’s discretion and typically structured in ways that favor the sponsor.[5]

The Deregulatory Moment

The SEC under Chair Gary Gensler finalized a comprehensive set of SPAC rules in January 2024, effective July 2024, that attempted to bring SPAC disclosures and liability closer to traditional IPO standards. These rules required SPACs to be treated as “blank check companies” under the PSLRA (removing the forward-looking statement safe harbor), required target companies to be treated as co-registrants, and mandated enhanced disclosure of sponsor compensation, conflicts of interest, and dilution.[8][16][21]

Under the current SEC leadership of Chair Paul Atkins, the regulatory agenda has shifted significantly. While no formal rollback of the 2024 SPAC rules has been proposed as of mid-2026, the SEC’s rulemaking agenda is notably absent any SPAC-related items, and Atkins has previously characterized the 2024 reforms as overly burdensome.[22] In March 2026, the SEC proposed new rules to make going public easier by expanding access to the short-form S-3 registration statement, a move that could further benefit SPAC structures.[23] Meanwhile, the broader deregulatory posture of the current administration — the “one-in, ten-out” executive order, the DOGE-driven regulatory review — creates an environment in which strengthened investor protections are structurally disfavored.[24]

• • •

VI. Path to Redemption: Closing Loopholes Without New Legislation

The good news — such as it is — is that the structural problems with SPACs do not require new legislation to address. They require closing the loopholes in existing law, enforcing existing authority, and eliminating the structural incentives that make exploitation profitable. Congress already decided in 1990 that blank check companies should be regulated. The task is to make that decision stick.

1. Close the Penny Stock Definitional Loophole

The SEC has the rulemaking authority to amend the definition of “blank check company” under Rule 419 to be function-based rather than price-based. If an entity has no specific business plan or purpose and exists to merge with an unidentified company, it is a blank check company regardless of its share price. The 2024 SPAC rules took a step in this direction by defining “blank check company” under the PSLRA to include SPACs, but Rule 419’s full protective framework — escrow requirements, investor approval mechanisms, and rescission rights — has still not been extended to SPACs. Closing this gap does not require Congress. It requires the SEC to make its existing definitions functionally coherent.

2. Cap the Sponsor Promote and Tie It to Performance

The 20% promote is the engine of the misalignment problem. The SEC could require that sponsor compensation in blank check company offerings be structured so that the sponsor bears meaningful economic risk commensurate with their equity stake, and that the promote vests only upon the merged entity achieving specified performance benchmarks over a minimum holding period (for example, the stock trading above a threshold for 12 consecutive months post-merger). This would make completing a bad deal unprofitable for sponsors, which is the single most effective intervention available. South Korea’s SPAC framework already implements better-aligned sponsor compensation structures that have produced measurably lower redemption rates and higher-quality target selection.[25]

3. Require Persistent Entity Identification Across Name Changes and Redomiciliations

The SEC already assigns CIK numbers to filers. Extending a requirement that any entity resulting from a de-SPAC transaction must maintain a continuous, publicly searchable linkage to all predecessor entity names, tickers, jurisdictions, and CIK numbers — displayed prominently in filings and on the SEC’s EDGAR system — would eliminate the traceability gap without imposing significant compliance burden. If a company changes its name, moves its jurisdiction, or restructures, the full chain of identity should be one click away. This is a data architecture problem, not a legislative one.

4. Mandate Uniform Jurisdiction for SEC-Registered Offerings

If an entity is registering securities with the SEC and listing on a U.S. exchange, it should be subject to U.S. jurisdiction for purposes of investor protection and enforcement. The current practice of incorporating in the Cayman Islands to conduct an IPO on NASDAQ, then redomiciling to Delaware at the moment of the merger, creates a deliberate gap in regulatory coverage during the period when investor capital is most at risk. The SEC could require that any blank check company conducting a registered offering under the Securities Act be organized under the laws of a U.S. state for the duration of its pre-merger existence.

5. Eliminate the Warrant-on-Redemption Asymmetry

Under current SPAC structures, an investor who redeems their shares before a merger still retains their warrants. This means institutional investors can get their money back and keep a free option on the upside of the merger — a combination that creates a risk-free trade for insiders at the expense of remaining shareholders whose ownership is diluted by warrant exercise. Requiring that warrants be forfeited upon redemption would eliminate this structural asymmetry and ensure that investors who exit the deal do not continue to extract value from investors who stay.

6. Enforce Existing Fiduciary Standards

SPAC sponsors owe fiduciary duties to their shareholders. The Delaware Chancery Court’s Multiplan decision established that the inherent conflict of interest in the SPAC promote structure is a cognizable issue under fiduciary duty analysis. Vigorous enforcement of existing fiduciary standards — rather than promulgating new ones — would create meaningful liability exposure for sponsors who complete value-destructive deals. This requires enforcement will, not new law.

The Principle

The goal is not to ban SPACs. It is to make the rules that already exist apply to the thing SPACs already are. If a SPAC functions as a blank check company, it should be regulated as one. If a sponsor receives equity for nominal consideration, the terms should protect investors as well as the sponsor. If an entity changes its name, jurisdiction, and structure, the trail should remain visible. None of this requires Congress to act. All of it requires regulators to stop treating the definitional workaround as though it were a legitimate distinction.

VII. Conclusion

The SPAC is not a financial innovation. It is a regulatory arbitrage — a structure designed to achieve the thing that blank check companies did in the 1980s while technically falling outside the definition Congress created to stop them. The results have been predictable: sponsors profit, institutional investors profit, and retail investors absorb catastrophic losses in a process that is deliberately difficult to trace after the fact.

The path to realignment does not require new powers or new agencies. It requires the SEC to apply its existing definitional and rulemaking authority to close the loopholes that make SPACs structurally exploitative, and to impose the accountability mechanisms — persistent identification, jurisdictional consistency, performance-linked compensation — that would make responsible conduct more profitable than circumvention.

The question has never been whether regulators can fix this. It is whether they will — and what it says about the integrity of the system when the answer, for thirty years running, has been no.

Citations

  1. Wikipedia. “Special-purpose acquisition company.” Accessed June 2026. Includes NPR citation on blank check company history and 1990s regulatory origin. Link
  2. Fidelity Investments. “SPACs explained.” Updated February 2026. Overview of SPAC mechanics, investor risks, and disclosure limitations. Link
  3. U.S. Congress. Securities Enforcement Remedies and Penny Stock Reform Act of 1990, S.647, 101st Congress. Enacted October 15, 1990 (Pub. L. 101-429). Link
  4. SEC Archives. “Comment response re: blank check company regulation.” Discusses 1980s blank check fraud and Rule 419 origins. Link
  5. Cambridge University Law Society, Per Incuriam. “SPAC to Basics (V): Calls for Reform” (Fred Halbhuber). Documents the 2,700-to-15 offering decline and the penny stock avoidance mechanism. Link
  6. U.S. Securities and Exchange Commission. “Special Purpose Acquisition Companies, Shell Companies, and Projections: Final Rules.” Release No. 33-11265, adopted January 24, 2024. Link
  7. Klausner, Michael, Michael Ohlrogge & Emily Ruan. “A Sober Look at SPACs.” Yale Journal on Regulation, Vol. 39, Issue 1, pp. 228–303 (2022). Stanford Law School. Link
  8. KPMG. “SEC finalizes SPAC rules.” April 23, 2024. Summary of final rules effective July 1, 2024. Link
  9. Klausner, Michael & Michael Ohlrogge. “Net Cash Per Share: The Key to Disclosing SPAC Dilution.” Stanford Law & Economics, published in Yale Journal on Regulation (2022). Documents the 20% promote as the primary source of investor dilution. Link
  10. Harvard Law School Forum on Corporate Governance. “The Limits of SPAC Sponsor Earnouts.” April 7, 2022. Documents how sponsor earnouts fail to align incentives or reduce dilution. Link
  11. Foley & Lardner LLP. “SPAC 4.0: From Spectacular Failures to a Disciplined Renaissance.” September 30, 2025. Reports 90%+ de-SPAC companies trading below $10 and hundreds of billions in cumulative value destruction. Link
  12. Certuity. “The Rise and Fall of SPACs: A Comprehensive Analysis.” April 22, 2025. Documents 67% and 59% average value loss for 2021 and 2022 mergers respectively. Link
  13. The Motley Fool. “SPAC Statistics for 2025.” January 16, 2026. Reports SPAC returns below market returns every year measured, SPACs as 63% of 2021 IPOs, and 46% of all IPOs from 2015–2025. Link
  14. SEC.gov. “Statement on the SPACs Proposal” (Commissioner Crenshaw). March 30, 2022. Documents the four-way conflict of interest among sponsors, targets, PIPE investors, and public shareholders. Link
  15. CLS Blue Sky Blog, Columbia Law School. “The SPACtacular Rise of the Special Purpose Acquisition Company: A Retail Investor’s Worst Nightmare.” December 13, 2021. Link
  16. Pillsbury Winthrop Shaw Pittman LLP. “SEC Adopts Long-Anticipated Rules for SPACs.” March 27, 2024. Detailed analysis of Final Rules including co-registrant status and PSLRA implications. Link
  17. Woodruff Sawyer. “SPAC Perspective: What Do We Do About Cayman?” Discusses the mass migration of SPACs from Delaware to the Cayman Islands and redomiciliation practices. Link
  18. Conventus Law / Ogier. “Cayman Islands — Incorporating in Cayman — SPACs.” August 2024. Describes redomiciliation as an “advantage” and flexibility of Cayman company law for SPAC structures. Link
  19. American Bar Association, Business Law Today. “‘De-SPAC’ Transactions: A Cayman Islands and British Virgin Islands Perspective.” June 2021. Documents the Social Capital Hedosophia / Opendoor redomiciliation as a case study. Link
  20. SPACTRAX. “SPAC Tracker Database.” Accessed June 2026. Notes that post-merger management teams are no longer tracked. Link
  21. Holland & Knight LLP. “A Summary and Early Analysis of SEC Final SPAC Rules.” February 8, 2024. Analysis of blank check company redefinition under the PSLRA and Article 15 of Regulation S-X. Link
  22. Gunderson Dettmer. “‘A New Day at the SEC’: New SEC Rulemaking Agenda Outlines Chair Atkins’s (De)Regulatory Priorities Through April 2026.” September 4, 2025. Notes that SPACs are absent from the rulemaking agenda and Atkins has previously characterized 2024 SPAC reforms as excessive. Link
  23. Loeb & Loeb LLP. “How Will the SEC’s Registered Offering Reform Proposal, if Adopted, Affect de-SPACs?” May 2026. Describes March 2026 SEC proposals to expand S-3 access and their implications for de-SPAC transactions. Link
  24. Competitive Enterprise Institute. “Trump slashed rulemaking in 2025. The hard part starts in 2026.” December 31, 2025. Documents the 129:1 deregulatory ratio and structural posture toward regulatory rollback. Link
  25. ScienceDirect. “De-SPAC performance under better aligned sponsor contracts.” March 2025. Study of Korean SPAC framework demonstrating improved outcomes under performance-linked sponsor compensation. Link