You mention to your treadmill neighbor that you’ve invested in a blank check company. “How do mergers work?”, she asks, “Aren’t blank check companies risky, what’s your protection?”. “SEC Rule 419”, is your out-of-breath response. “What is Rule 419 SEC?” she inquires, and you tell her …

What is Rule 419 SEC?

Rule 419 SEC is a securities regulatory statute designed to protect investors from fraud and abuse. It is a protective provision mandated and enforced by the Securities and Exchange Commission (SEC) to ensure that funds raised by blank check firms are held in escrow or a brokerage trust account and cannot be accessed until the proposed business merger or acquisition receives approval from the blank check company shareholders.

As you wipe down the treadmill handles, you answer your interested gym mate’s question; what is Rule 419 SEC?

Blank Check Company Defined – A blank check company is a development stage firm without a specific purpose or business plan but will at some point in the future engage in a merger or acquisition with a currently unidentified company or companies, or other entity or person.

The development company raises investment capital through an IPO, an initial public offering, of penny stock as defined in SEC Rule 3a51-1 under the SEC Act of 1934. Penny stocks are shares in small companies that trade under $5.00 per share or lower.

What is Rule 419 SEC? It is the unsung protector crafted to shield you from unscrupulous financial predators preying on unsuspecting investors. But how?

Escrow of IPO Proceeds – All IPO funds are placed in escrow or a brokerage trust account. Upon the identification of a legitimate business entity and when certain conditions are met, the blank check company will then be granted access to the proceeds. This provision protects investor interests and funds.

Access to Funds – The blank check company must meet the following conditions to gain access to IPO funds:

1.  Shareholders must be provided with or have access to full disclosure about the proposed business merger or acquisition.

2.  The terms of the proposed business merger or acquisition must be approved by a majority shareholder vote.

3.  Shareholders must have the option to approve the proposed transaction or receive a refund from monies held in escrow or trust.

Post Amendment Condition – The company must file a post-effective amendment to its SEC Form 10 Registration Statement.  The registration statement is a securities disclosure the blank check company files with the SEC allowing for the issuance of shares to the public. The amendment contains proposed merger or acquisition details and must receive SEC approval prior to any release of funds.

Share Trading Restrictions – Blank check company shares are usually restricted meaning they cannot be traded until the merger or acquisition is completed and escrow funds have been released.

What is Rule 419 SEC? Rule 419 SEC is investor protection against fraud by ensuring their investment in blank check companies and Special Purpose Acquisition Companies (SPAC) are safeguarded until a legitimate business opportunity is identified and approved. The transparency of full disclosure is a risk-mitigating positive externality.

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