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.
Lack of 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.