Special Purpose Acquisition Company (SPAC) due diligence considerations.

Special Purpose Acquisition Companies (SPACs) are a new and convenient way of raising finance for a specific purpose, most usually the acquisition of a company. Neil Miller outlines considerations regarding regulatory compliance and due diligence.

SPACs are “shell companies” or “blank cheque companies” without any revenue or operating history and yet they have become an increasingly popular phenomena in raising corporate finance in the USA and are now appearing as a route to the UK markets.

The UK’s Financial Conduct Authority will launch a consultation on strengthening investor protections regarding SPACs and new rules are to be published by early summer.

Listing a SPAC on the London Stock Exchange for example, begins with an Initial Public Offering (IPO) that allows the company to attract investment from a wide range of investors who are looking to generate returns through the acquisition of another company, business venture or asset.

It takes an average of 18-24 months for a SPAC to attract investment, find and complete an acquisition using at least 80% of its net assets.  If a SPAC does not find a suitable acquisition in that timeframe, it could enter into liquidation. At which point, the investment proceeds will be returned to the shareholders and investors minus expenses.

As with any public listing, good governance and compliance is required to ensure that the investors are protected and do not fall foul of fraudulent schemes, non-compliance or embroiled with an unfit SPAC.

A SPAC should be managed by an experienced management team, who have had previous experience in the private equity, corporate finance and market advisors.

In a traditional IPO, the prospectus focuses on historical facts about the issuer and its past performance; with SPACs there is little history.  Therefore financial due diligence is extremely difficult to give an assured assessment of the company’s performance.

Investor Risk Considerations:

SPACs are subject to regulation and rules set by the Securities Exchange Commission (“SEC”) in the USA and London Stock Exchange in the UK. Therefore under regulations and in terms of mitigating risk, standard background checks on the board directors and senior management of the SPAC is essential.  Providing investors with the facts they require to make assured decisions should involve:

• an interrogation of the corporate and personal history of each board member, specifically looking for reputational risks, red flags, adverse findings, false, conflicting or exaggerated statements (www.tenintel.com/due-diligence/background-checks/)
• verifing the information provided by the SPAC and identify gaps for further analysis
• research covering multiple international jurisdictions and performed in different languages
• an independent and unbiased insight and assessment of the appropriateness of each board member/individual based on third-party interviews with former colleagues and clients.

Investment Considerations

Ensuring the appropriateness and the source of funds, wealth and investment in return for shares/warrants is essential for SPACs to comply with financial regulatory requirements and best practice anti-money laundering guidelines.

Insider Trading Considerations

SPACs cannot identify acquisition targets prior to the closing of the IPO.  The SEC requires disclosure in the IPO prospectus to the effect that the SPAC currently does not have any specific acquisition under consideration.

Investors and brokers should ensure that the SPAC’s officers and directors are not selected nor considered linked to an acquisition; nor have they had any discussions regarding possible acquisition targets among themselves or with underwriters or other advisors.

If there is unsolicited interest from a potential acquisition target, the SPAC and its board directors must refuse to engage and should respond that they will not consider the potential target until after the IPO is completed.

Demonstrate Compliance

The underlying guidance for all financial and investment transactions is to demonstrate, endorse and evidence good financial crime compliance. Implementing a robust due diligence checklist to mitigate risk is essential.