As never before, securities regulators are taking off the blinders when it comes to blind pools.
Why do they exist? Promoters love them because it gives them a way to raise funds without detailing their plans for the money. Companies that merge with blind pools love them because it is a way for them to go public cheaper and quicker than they could through a regular initial public stock offering. And investors, the theory goes, love them because it is a way to get on the ground floor of an investment that could make them rich.Regulators are skeptical. In Utah, promoters must set aside 80 percent of any money they raise for blind pools - so named because investors have no idea what they're investing in - until the pool achieves its goal and is bought by an ongoing business. In New Jersey, regulators can deny registrations to these risky investments if they see fit. And in Washington, a task force of state regulators concerned about allegations of fraud and stock manipulation by blind pools recently developed a model statute to help states crack down on them.
And yet in this environment, veteran Wall Street trader Yves F.M. Hentic is launching blind pools as fast as he can. Through a holding company called Merger Inc., the 41-year-old Hentic has launched a dozen blind pools in a little more than a year - 11 of which have found merger partners - and in May, filed stock offerings for three more blind pools.
"The concept of a blind pool is a problem generally," said Laura Ward, the New York assistant attorney general in charge of the securities division. If she had her way, blind pools would be "illegal across the board." But short of that, she said, "people should realize that investments in blind pools are very, very risky."
Blind pools are, quite simply, corporate shells. They contain little more than the $400,000 to $800,000 in cash they typically receive from selling stock. They have no products, no revenue or earnings, and often no plans for the use of the money they raise, although many state that their purpose is to find an ongoing business with which to merge.
Blind pools aren't a new concoction. They date back to 17th century England and came into vogue in the United States during the market surges of the 1920s and again in the 1960s and 1980s - tending to proliferate during prosperous times because it is easier to get people to part with their money.
Some well-known deals have started with blind pools. In 1924, Clarence Dillon, who established the highly regarded investment-banking house of Dillon, Read & Co., raised $147 million for a blind pool. The pool eventually was used to acquire Dodge Brothers, the automaker that later was sold to Chrysler, said business historian Robert Sobel.
But they also have frequently been vehicles for fraud and stock manipulation, regulators say. That's because many do not trade nationally and thus don't have to file reports with the Securities and Exchange Commission.
Because most are penny stocks - each share goes for only a few cents - blind pools abound wherever there is an active penny stock market: New York, Las Vegas, Denver and Spokane, Wash. Low prices facilitate manipulation in the secondary market and make the per-share price of a pool attractive to a merger partner, regulators said.
In the first six months of this year about half of all stock underwritings of $10 or less involved blind pools, according to the OTC Stock Journal.
Defenders of blind pools say they are a legitimate form of financing for small companies. Companies that tend to merge with blind pools have little chance of securing bank loans but prefer not to give up large equity stakes to venture capitalists.
Hentic says his blind pools differ from most in several ways.
Blind pools usually sell stock through a small, over-the-counter concern or through no underwriter at all; he sells stock through a New York Stock Exchange member. Most blind pools are offered on a "best efforts basis"; his offers are on a so-called firm basis, meaning the underwriter will buy any unsold shares.
Hentic's blind pools, which bear such irreverent names as Mergers Are Us Inc. and Big Mergers Inc., aren't penny stocks. The typical Hentic issue is sold - primarily to professional investors - at $6 a share through small offerings, usually 25,000 units, each made up of one share and 40 warrants with exercise prices close to the offering price of the units. Warrants are options that enable investors to buy stock in the future at a predetermined price.
Companies that have merged with Hentic's corporate creations run the gamut from startups such as Joe Franklin Productions Inc., established to market the talk-show host's nostalgic videos, to established businesses such as Sarasota, Fla.-based Accucomp Inc., a profitable computer dealer with annualized 1988 sales of $70 million.
"We're trying to legitimize this whole pool business," Hentic said from his broom closet-size, $110-a-month office on the ground floor of a Manhattan apartment building. "Our sole purpose is to attract companies that are legitimate that want to avoid the risk" of an initial public offering.
Hentic, a one-time bond analyst, stock speculator and investment banker, has had run-ins with securities regulators in the past, built and lost two fortunes, and even now, has the National Association of Securities Dealers questioning at least three of his blind pools.
Hentic claims that he and his partners - William Pryor, who was a broker at Hentic's defunct brokerage, and Stewart, a Manhattan securities lawyer - only make money through investment-banking fees paid to Merger Inc. and from the 2-percent to 4-percent stake it retains in each of the merged companies. So far, Hentic said, he and his partners have made nothing on their deals.