Aptly titled blank-check companies disclose little

December 18, 2005|By JAY HANCOCK

Hey you. Got $1,000 or so? Tired of mutual funds, bank deposits and plain old stocks and bonds? Want to mimic the big money, go where few ordinary investors have gone?

Ferris, Baker Watts might have a deal for you. The Baltimore financial house is managing three prospective stock offerings that are described as giving small investors entry into the rarified and red-hot world of "private equity" corporate buyouts.

It's "an opportunity for a retail investor to play private equity with less of a risk" than normal private pools, says Richard Prins, senior vice president at Ferris. But, he adds, "it's certainly not appropriate for all investors."

These investments are called "blank-check" companies, which gives a clue about their risk. Through a public stock offering, you give your money to buyout artists without knowing what they will acquire.

If all goes as planned, a blank check company buys a business, uses your money and that of other investors to pay for it, and you become a shareholder in the business. Like all buyout operators, they try to increase the company's value by cutting costs and expanding sales.

Then your stock and the warrants (they're like options) that usually come with it go up. If all goes as planned.

Sometimes on Wall Street, just for your information, that doesn't happen.

"You're trusting the people who collect this pool of money to then turn around and purchase some kind of business," says Maryland Securities Commissioner Melanie Senter Lubin. "I would definitely put it in the higher-risk category of investments. Like anything, the investors need to do their own due diligence and understand what they're buying."

This is difficult, however, in the case of a blank-check enterprise. There's not much to understand.

Take Harbor Acquisition, a blank-check company associated with Ferris to be run by Robert J. Hanks and David A. R. Dullum, of the Boston venture capital firm New England Partners. Harbor's shares haven't floated yet, but the company has registered with the Securities and Exchange Commission.

The whole point of SEC filings is disclosure, to give a full airing of a company's position so people know what they're buying. For Harbor and other blank-check companies, however, the main disclosure in the filings is that there is nothing to disclose. It takes 70 or so pages to say so, of course, but that's the upshot.

Every stock prospectus must contain a section called "Management's Discussion and Analysis of Financial Condition and Results of Operations."

But the key point in that part of Harbor's filing is that, "We have neither engaged in any operations nor generated any revenues to date."

There is a "Proposed Business" section. Harbor's says that it will try to buy a company "in one of the following sectors: "Consumer Products" or "Industrial Products." That narrows it down.

There is a "Risks" section longer than your arm, much of which you can imagine.

In defense of blank-check companies, I should say that regulators have loaded them with protections that were lacking in notorious earlier versions. Formerly they were known as "blind pools" and their cash sometimes landed in the pockets of blind-pool cronies.

Now almost all the cash goes into escrow. Blank-check companies file detailed SEC disclosures once they identify a business to buy, and shareholders get to vote on it.

If no deal is struck in 18 months, the blank check company has to return the money.

And unlike conventional private-equity partners, Prins points out, public investors can sell blank-check stock any time. Harbor would seek a listing on the American Stock Exchange.

But there is still the problem of finding a good company, especially now that every pension and trust fund is getting into private-equity. With 12 percent ownership between them, Hanks and Dullum would presumably have high incentive to get great results for Harbor.

But their day jobs give them conflicting interests; if they find a fabulous deal, to whom will they deliver it? The Harbor investors? Or their venture capital partners? (Probably because companies going public are wary of touting themselves outside official documents, the two didn't answer my queries.)

The history of American finance, from credit cards to hedge funds, is the little guy getting access to bigwig products. If Ferris launches Harbor and its other blank-checks, Prins says the firm will make sure the stock goes only to investors who understand the risks.

Even so, this is one exclusive club you might want to avoid.


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