| Securities Lawyer's Deskbook
of Cincinnati College of Law
Notice: The information on this page may not be current. To learn more, please click here.
General Rules and Regulations
Securities Act of 1933
Rule 419 -- Offerings by Blank Check Companies
- Scope of the rule and definitions.
- The provisions of this section shall apply to every
registration statement filed under the Act relating to an offering by a blank check
- For purposes of this section, the term "blank
check company" shall mean a company that:
- Is a development stage company that has no specific
business plan or purpose or has indicated that its business plan is to engage in
a merger or acquisition with an unidentified company or companies, or other entity
or person; and
- Is issuing "penny stock," as defined
in Rule 3a51-1 under the Securities Exchange
Act of 1934.
- For purposes of this section, the term "purchaser"
shall mean any person acquiring securities directly or indirectly in the offering,
for cash or otherwise, including promoters or others receiving securities as compensation
in connection with the offering.
- Deposit of securities and proceeds in escrow
or trust account-
- Except as otherwise provided in this section or
prohibited by other applicable law, all securities issued in connection with an offering
by a blank check company and the gross proceeds from the offering shall be deposited
- An escrow account maintained by an "insured
depository institution," as that term is defined in section
3(c)(2) of the Federal Deposit Insurance Act; or
- A separate bank account established
by a broker or dealer registered under the Exchange Act maintaining
net capital equal to or exceeding $25,000 (as calculated pursuant
to Exchange Act Rule 15c3-1,
in which the broker or dealer acts as trustee for persons having
the beneficial interests in the account.
- If funds and securities are deposited into an
escrow account maintained by an insured depository institution, the deposit account
records of the insured depository institution must provide that funds in the escrow
account are held for the benefit of the purchasers named and identified in accordance
with 12 CFR part 330.1 of the regulations of the Federal Deposit Insurance Corporation,
and the records of the escrow agent, maintained in good faith and in the regular
course of business, must show the name and interest of each party to the account.
If funds and securities are deposited in a separate bank account established by a
broker or dealer acting as a trustee, the books and records of the broker-dealer
must indicate the name, address, and interest of each person for whom the account
- Deposit and investment of proceeds.
- All offering proceeds, after deduction of cash
paid for underwriting commissions, underwriting expenses and dealer allowances, and
amounts permitted to be released to the registrant pursuant to paragraph (b)(2)(vi)
of this section, shall be deposited promptly into the escrow or trust account; provided,
however, that no deduction may be made for underwriting commissions, underwriting
expenses or dealer allowances payable to an affiliate of the registrant.
- Deposited proceeds shall be in the form of checks,
drafts, or money orders payable to the order of the escrow agent or trustee.
- Deposited proceeds and interest or dividends
thereon, if any, shall be held for the sole benefit of the purchasers of the securities.
- Deposited proceeds shall be invested in one of
- An obligation that constitutes a "deposit,"
as that term is defined in section
3(1) of the Federal Deposit Insurance Act;
- Securities of any open-end investment company
registered under the Investment Company Act of 1940 that holds itself out as a
money market fund meeting the conditions of paragraphs (c)(2), (c)(3), and (c)(4)
of Rule 2a-7 under the Investment Company
- Securities that are direct obligations of, or
obligations guaranteed as to principal or interest by, the United States.
Note to Rule 419(b)(2)(iv): Issuers are cautioned that
investments in government securities are inappropriate unless such securities can
be readily sold or otherwise disposed of for cash at the time required without any
dissipation of offering proceeds invested.
- Interest or dividends earned on the funds, if any,
shall be held in the escrow or trust account until the funds are released in accordance
with the provisions of this section. If funds held in the escrow or trust account
are released to a purchaser of the securities, the purchasers shall receive interest
or dividends earned, if any, on such funds up to the date of release. If funds held
in the escrow or trust account are released to the registrant, interest or dividends
earned on such funds up to the date of release may be released to the registrant.
- The registrant may receive up to 10 percent of
the proceeds remaining after payment of underwriting commissions, underwriting expenses
and dealer allowances permitted by paragraph (b)(2)(i) of this section, exclusive
of interest or dividends, as those proceeds are deposited into the escrow or trust
- Deposit of securities.
- All securities issued in connection with the offering,
whether or not for cash consideration, and any other securities issued with respect
to such securities, including securities issued with respect to stock splits, stock
dividends, or similar rights, shall be deposited directly into the escrow or trust
account promptly upon issuance. The identity of the purchaser of the securities shall
be included on the stock certificates or other documents evidencing such securities.
See also Rule 15g-8 of the Exchange Act
regarding restrictions on sales of, or offers to sell, securities deposited in the
escrow or trust account.
- Securities held in the escrow or trust account
are to remain as issued and deposited and shall be held for the sole benefit of the
purchasers, who shall have voting rights, if any, with respect to securities held
in their names, as provided by applicable state law. No transfer or other disposition
of securities held in the escrow or trust account or any interest related to such
securities shall be permitted other than by will or the laws of descent and distribution,
or pursuant to a qualified domestic relations order as defined by the Internal
Revenue Code of 1986 as amended (26 U.S.C. 1 et seq.), or Title 1 of the
Employee Retirement Income
Security Act (29 U.S.C. 1001 et seq.), or the rules thereunder.
- Warrants, convertible securities or other derivative
securities relating to securities held in the escrow or trust account may be exercised
or converted in accordance with their terms; provided, however, that
securities received upon exercise or conversion, together with any cash or other
consideration paid in connection with the exercise or conversion, are promptly deposited
into the escrow or trust account.
- Escrow or trust agreement. A copy of the
executed escrow or trust agreement shall be filed as an exhibit to the
registration statement and shall contain the provisions of paragraphs
(b)(2), (b)(3), and (e)(3) of this section.
- Request for supplemental information. Upon request
by the Commission or the staff, the registrant shall furnish as supplemental information
the names and addresses of persons for whom securities are held in the escrow or
Note to Rule 419(b): With respect to a blank check
offering subject to both Rule 419 and Exchange
Act Rule 15c2-4, the requirements
of Rule 15c2-4 are applicable only until the conditions of the offering
governed by that Rule are met (e.g., reaching the minimum in a
"part-or-none" offering). When those conditions are satisfied,
Rule 419 continues to govern the use of offering proceeds.
- Disclosure of offering terms. The initial
registration statement shall disclose the specific terms of the offering, including,
but not limited to:
- The terms and provisions of the escrow or trust agreement
and the effect thereof upon the registrant's right to receive funds and the effect
of the escrow or trust agreement upon the purchaser's funds and securities required
to be deposited into the escrow or trust account, including, if applicable, any material
risk of non-insurance of purchasers' funds resulting from deposits in excess of the
insured amounts; and
- The obligation of the registrant to provide, and
the right of the purchaser to receive, information regarding an acquisition, including
the requirement that pursuant to this section, purchasers confirm in writing their
investment in the registrant's securities as specified in paragraph (e) of this section.
- Probable acquisition post-effective amendment
requirement. If, during any period in which offers or sales are being made,
a significant acquisition becomes probable, the registrant shall file promptly a
post-effective amendment disclosing the information specified by the applicable registration
statement form and Industry Guides, including financial statements of the registrant
and the company to be acquired as well as pro forma financial information required
by the form and applicable rules and regulations. Where warrants, rights or other
derivative securities issued in the initial offering are exercisable, there is a
continuous offering of the underlying security.
- Release of deposited and funds securities-
- Post-effective amendment for acquisition agreement.
Upon execution of an agreement(s) for the acquisition(s) of a business(es) or assets
that will constitute the business (or a line of business) of the registrant and for
which the fair value of the business(es) or net assets to be acquired represents
at least 80 percent of the maximum offering proceeds, including proceeds received
or to be received upon the exercise or conversion of any securities offered, but
excluding amounts payable to non-affiliates for underwriting commissions, underwriting
expenses, and dealer allowances, the registrant shall file a post-effective amendment
- Discloses the information specified by the applicable
registration statement form and Industry Guides, including financial statements of
the registrant and the company acquired or to be acquired and pro forma financial
information required by the form and applicable rules and regulations;
- Discloses the results of the initial offering,
including but not limited to:
- The gross offering proceeds received to date,
specifying the amounts paid for underwriter commissions, underwriting expenses and
dealer allowances, amounts disbursed to the registrant, and amounts remaining in
the escrow or trust account; and
- The specific amount, use and application of
funds disbursed to the registrant to date, including, but not limited to, the amounts
paid to officers, directors, promoters, controlling shareholders or affiliates, either
directly or indirectly, specifying the amounts and purposes of such payments; and
- Discloses the terms of the offering
as described pursuant to paragraph (e)(2) of this section.
- Terms of the offering. The terms of the offering
must provide, and the registrant must satisfy, the following conditions.
- Within five business days after the effective date
of the post-effective amendment(s), the registrant shall send by first class mail
or other equally prompt means, to each purchaser of securities held in escrow or
trust, a copy of the prospectus contained in the post-effective amendment and any
amendment or supplement thereto;
- Each purchaser shall have no fewer than 20 business
days and no more than 45 business days from the effective date of the post-effective
amendment to notify the registrant in writing that the purchaser elects to remain
an investor. If the registrant has not received such written notification by the
45th business day following the effective date of the post-effective amendment, funds
and interest or dividends, if any, held in the escrow or trust account shall be sent
by first class mail or other equally prompt means to the purchaser within five business
- The acquisition(s) meeting the criteria
set forth in paragraph (e)(1) of this section will be consummated
if a sufficient number of purchasers confirm their investments; and
- If a consummated acquisition(s) meeting the requirements
of this section has not occurred by a date 18 months after the effective date of
the initial registration statement, funds held in the escrow or trust account shall
be returned by first class mail or equally prompt means to the purchaser within five
business days following that date.
- Conditions for release of deposited securities and
funds. Funds held in the escrow or trust account may be released to the registrant
and securities may be delivered to the purchaser or other registered holder identified
on the deposited securities only at the same time as or after:
- The escrow agent or trustee has received
a signed representation from the registrant, together with other evidence
acceptable to the escrow agent or trustee, that the requirements of
paragraphs (e)(1) and (e)(2) of this section have been met; and
- Consummation of an acquisition(s) meeting the
requirements of paragraph (e)(2)(iii) of this section.
- Prospectus supplement. If funds and securities are
released from the escrow or trust account to the registrant pursuant to this paragraph,
the prospectus shall be supplemented to indicate the amount of funds and securities
released and the date of release.
Notes to Rule 419(e)
Note 1. With respect to a blank check offering
subject to both Rule 419 and Exchange Act Rule
10b-9, the requirements of Rule 10b-9 are applicable only until the
conditions of the offering governed by that Rule are met (e.g., reaching
the minimum in a "part-or-none" offering). When those conditions
are satisfied, Rule 419 continues to govern the use of offering proceeds.
Note 2. If the business(es) or assets are acquired for cash,
the fair value shall be presumed to be equal to the cash paid. If all or part of
the consideration paid consists of securities or other non-cash consideration, the
fair value shall be determined by an accepted standard, such as bona fide sales of
the assets or similar assets made within a reasonable time, forecasts of expected
cash flows, independent appraisals, etc. Such valuation must be reasonable at the
- Financial statements. The registrant
- Furnish to security holders audited financial
statements for the first full fiscal year of operations following consummation
of an acquisition pursuant to paragraph (e) of this section, together
with the information required by Item
303(a) of Regulation S-K, no later than 90 days after the end of such
fiscal year; and
- File the financial statements and additional
information with the Commission under cover of Form
8-K; provided, however, that such financial statements and
related information need not be filed separately if the registrant is
filing reports pursuant to Section 13(a)
or 15(d) of the Exchange Act.
57 FR 18043, Apr. 28, 1992
Return to top