How due diligence reduces the regulatory risk for SPAC transactions

Now is the time to reassess due diligence procedures and consider supplementing the process to address the increased regulatory risk.

Special purpose acquisition companies (SPACs) raised $122.2b¹ in 2021 (the capital raised from January to March 2021 exceeded the capital raised in all of the record-breaking 2020).² In a SPAC, a high-profile sponsor raises money, identifies a Target operating business (Target), negotiates a valuation and completes a combination that results in the Target operating business becoming a public company. The SPAC's popularity as an investment vehicle has led to increased regulatory scrutiny from the SEC and FINRA. Customary financial diligence is typically forward-looking and may not cover the regulatory risk of the Target’s current and historical spend and processes. An emerging practice is to perform Integrity due diligence, which leverages forensic procedures to perform a transaction-level analysis of the Target. Adding Integrity due diligence procedures does not delay the transaction and provides the benefit of meaningful insights to both the sponsor and Target.

After emerging as a public company, the operating business should consider performing a compliance program assessment and periodic audits to evaluate the effectiveness of recently implemented compliance functions and benchmark the current program to the DOJ’s Evaluation of Corporate Compliance Programs.”⁵