There's been quite a bit of attention this year on "blank check" IPOs. DraftKings (DKNG -1.69%) used one to go public. More recently, hedge fund manager Bill Ackman has been in the headlines as his new special purpose acquisition company (SPAC) -- another moniker for these blank check IPOs -- began trading Wednesday. I'm sure many are wondering what these companies really are. 

What is a "Blank Check" IPO?

In the simplest terms, a blank check company is a public entity that doesn't have a purpose or business plan. When it's being used as an instrument for taking a private company public, the blank check company goes public and raises capital. Then it acquires the private business that is meant to become public.

Man drawing charts

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Rise of the unconventional IPO

The popularity of the blank check method these days can be largely attributed to the volatility of markets and COVID-19. Imagine a company going the traditional route of an initial public offering (IPO) back in March. The pricing would be all over the place. Even now, there is a lot of uncertainty in the market. The blank check method creates a more predictable model for putting a private company into the public markets.

The example that everyone is probably most familiar with is DraftKings. The online fantasy-sports contest and sports wagering company went public through the blank check method. DraftKings merged with publicly-traded Diamond Eagle Acquisition, a SPAC basically created to bring the privately held DraftKings public. After the deal was finished, the SPAC's name was changed to DraftKings, and the stock ticker became DKNG.

In the case of Ackman's current SPAC, the company doesn't have a specific acquisition target. Its IPO was the largest ever for this type of business, with $4 billion raised in total. Ackman was quoted as saying he wants to buy "a mature unicorn." 

What it means for investors

The primary thing investors should keep in mind is that they don't always know what these SPACs are going to do. In the instance of the DraftKings merger, it was a little clearer what you were investing in if you bought shares of Diamond Eagle Acquisition prior to the deal going through. Though Ackman has quite a good track record running hedge funds, you still don't know for sure what this SPAC is going to buy. Therefore, you'd be making an investment based on your faith in the manager, rather than the holdings.

In the case of DraftKings, shares are up 249% this year. Those who bought in early when it was clear what the blank check company was doing made out quite well. It's a unique form of business, and different than investing in typical stocks. You definitely want to do your homework before diving in.