Blind Pool Investment Fraud Offerings
It's So Good I Can't Tell You
During prosperous times, investors tend to become less cautious
when considering investment alternatives, a course of action that
can have disastrous results. One type of investment instrument
that snares 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 reveal any proposed investment intent whatsoever.
They are literally "blank checks" that the promoter can
use at his whim.
Sometimes, the promoter knows exactly what he intends to do with
the money raised at the time he offers these 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 History 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 carrying
on an undertaking of great advantages, but nobody to know what
it is." They also surfaced in America during the stock
market boom of the 1920's.
Aside from the lack of information regarding use of proceeds,
blind pool offerings are often characterized by the absence of
proven managerial and technical expertise within the enterprise.
Blind pools are often undercapitalized, having virtually no assets
other than the other money obtained through the offering itself.
Used for Reverse Takeovers
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, 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 what the public investors paid, can sell their interests
immediately after an acquisition when the price is high, leaving
the investors to fend for themselves.
If the pool itself cannot afford to buy another company, the promoters
will be quick to point out that there are many small, private companies
that are anxious to go public and one of them will probably acquire
the blind pool for a handsome price. The truth is, these reverse
acquisitions rarely occur, and when they do the financial position
of the newly public company can rarely sustain the over-inflated
price of the stock. Very few blind pools are truly successful.
The real winners in the pool are usually the underwriters, attorneys,
and promoters, not the investors themselves.
Recourse
Unfortunately, if these investments are mismanaged and the investors
lose their money, the victims don't usually complain, thinking,
rightly so, that the losses would not justify the cost of suing
the promoters. Investors tend simply to absorb the losses and do
not bother to complain to regulatory authorities about the fraud
or misuse.
As a result of limited resources, regulators do not give high
priority to blind pools. Their relative insignificance in the investment
marketplace and the lack of public complaints has fostered this
policy.
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