Blank-Check IPOs Probed

Broadband Capital Management was the underwriter on Services Acquisition's June 2005 IPO.

The money raised in a blank-check offering is held in an interest-bearing account and ultimately returned to investors if a merger is not completed within 18 month of the IPO.

Still, the deals keep coming despite the less-than-auspicious track record on the merger front. Just last week, Acquicor Technology(AQR.U Quote), a blank-check company led by three former Apple executives, raised $150 million to finance the acquisition of a business "in the technology, multimedia and networking sectors."

One thing regulators are looking into is the post-IPO trading activity in the warrants to purchase future stock, which are sold to investors as part of every blank-check initial public offering, sources say.

In a standard blank-check offering, an investor purchases a unit, which typically includes a share of stock, and one or two warrants -- a specialized security that gives the owner the right to buy additional shares at a predetermined price. About a month after the IPO, the stock and warrants typically begin to trade as two separate securities.

The units in a blank-check offering are typically priced around $6 or $7 a share.

If a blank-check company can find a merger partner, the warrants could be worth quite a bit in the future. But until a deal is announced, there's often little demand for the warrants.

For instance, the warrants issued by Courtside Acquisition(CRB Quote), a blank check company underwritten by EarlyBird, most recently traded around 68 cents a share. The stock itself trades at $5.32.

Each unit in the Courtside IPO, which raised $72 million last June, was priced at $6.

To some degree, it's not surprising that regulators would take a look at EarlyBird. David Nussbaum, EarlyBirdCapital's chairman, and Steven Levine, the firm's chief executive, both hail from GKN Securities, a defunct brokerage that tried to make a name for itself by underwriting blank-check IPOs. The firm, however, ran into its own problems with securities regulators in the 1990s.