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Beware Special Purpose Acquisition Companies

Imagine that you were able to buy shares of a holding company before it actually held anything other than straight cash, that’s what investing in a special purpose acquisition company (SPAC) is like. A SPAC, usually run by relatively well-known hotshots, is a shell company that seeks to raise money that they will use to purchase a business and run it better. It was recently the target of a “Stocks to Avoid” column in Smart Money magazine (page 28, June 2006 issue) and I myself would have serious reservations about investing in a shell company whose business plan is as weak as any of these SPACs.

The interesting part is that the SPAC usually guarantees that if they don’t find a takeover candidate within 18 months, they will return your money less 20% for lawyers and underwriters! Seems like a shady operation to me. Here are some names and tickers of SPACs: