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SPACs: De-SPAC Risk Management Trends for 2021-2023

What Short Sellers, the SEC, and SPAC-investors will be scrutinizing.

I-OnAsia is an investigations company that conducts background checks and pre-transaction due diligence in Asia, the United States, the UK and elsewhere internationally.

In this blog we focus on De-SPACs and the acquisitions by SPACs of private companies. We forecast a few risk management trends for 2021-2023.

This blog is part of an ongoing series on the still hot SPACs market:

In this blog we are talking about "De-SPAC" situations.

To recap, investors in SPACs are essentially writing a blank check to a team of managers that the team of managers can find a great high growth private company and buy it. So, once a SPAC has raised money from investors, the clock starts ticking: a good target must be found. These situations come within a few years after SPACs have raised money from investors. When a De-SPAC situation occurs, the publicly listed SPAC uses the money it raised from investors to buy a private company. A big wave of De-SPAC deals is expected over the next two years. The market will reward SPAC managers with smart acquisitions, and the market will penalize bad buys.

As we prepare to publish this article, sophisticated market watchers are expressing concerns: Are there really enough high quality private companies out there for all of these new SPACs to purchase? Many of our friends at global stock exchanges are suggesting there may not be, as they ask this question in return: "Why would a good company need to go through the back door (ie go-public through a sale to a SPAC) when they can walk through the front door (and directly list on a major exchange)?"


One of the key reasons why a private company might be willing to sell itself to a SPAC is because it is too young and does not have the revenues typically needed to qualify for a listing on a major exchange.

There are differing expectation between various exchanges for at least some revenues, particularly in the most recent year, and so the truthfulness of disclosures about that young company's actual revenues has heightened importance.

Normally, revenues are verified by an accounting firm. Interviews of customers, tests of the books, and other work will be performed by the accounting firm to verify the numbers. Indeed, when a more seasoned company starts thinking about an IPO, it will have hired a major accounting company to perform its annual audits - sometimes years ahead of any public listing - so that by the time the seasoned company gets ready to go IPO it has a track record of withstanding the scrutiny of a public accounting company's audit.

But, as the recent horrific experience of Luckin Coffee has shown, auditors can be fooled. Short sellers, who bet that a stock price will fall, know the ways in which auditors may get revenue verification wrong, and been known to invest heavily in independent investigations that uncover fraud in stock stories that appear too good to be true.

Short seller success at finding fraud at publicly listed companies is proof that revenue verification is a high stakes game, and that SPAC managers and the boards of directors of SPACs will be wise to not rely solely on the results of an accounting company's audit.

Did you know that, according the the Association of Certified Fraud Examiners, external auditors actually discover only a tiny FOUR PERCENT (4%) of all frauds?


Because the vast majority of frauds are initially detected from tips by employees, customers, and vendors. Shareholders and competitors also sometimes have important knowledge.

So, SPAC managers and the boards of directors are really going to be challenged to interview these potential sources of insight effectively. Those with the best process that verifies De-SPAC target revenues will have a competitive advantage over those that do not. Managers who fail at revenue verification are likely to get sued and investigated by the SEC.


Over the past two decades, fraud investigation has been professionalized. Today the Association of Fraud Examiners has over 85,000 members.

As more experience is gained through fraud investigations, ACFE studies have begun to show there there are four key ways that frauds are concealed. According to the ACFE, these are (1) by creating false physical documents (2) altering physical documents (3) altering electronic files and (4) creating false documents or files.

What does this insight mean for SPAC fiduciaries? Before a De-SPAC acquisition is completed, some efforts should be made to:

  1. Independently interview employees, customers, and vendors.

  2. To test key physical documents and electronic files for falsification or alteration

  3. With a specific focus on interviewing those employees, customers, and vendors with the likely best knowledge about documents that may yield insights on revenues.

  4. Using a methodology most likely to achieve a reliable result.

Humbly, fraud detection is an area of expertise at I-OnAsia. To find out more about how we translate this expertise into value from a due diligence perspective, take a look here.


SPAC leaders are increasingly considered to be competing for deals normally chased by private equity and venture fund managers.

Over the course of two decades of work on behalf of Asia's leading PE and VC funds, we've heard again and again that the secret to their success is "Team, Timing, Technology". If founders and key executives are nimble and effective, they can make a venture grow. A bad team can quickly sour a VC or PE investment to go sour. So, PE and VC funds spend a considerable amount of effort getting to know the founders of their potential investees before a deal is done.

And, the best VC and PE firms hire independent risk management firms like I-OnAsia to independently test their understanding by performing confidential interviews and other forms of enhanced due diligence on founders before any deal is closed.

SPAC managers would therefore be very wise to follow these best practices and also conduct similar deep dive searches on the backgrounds and reputations and activities of key managers of acquisition targets.


One of the obvious but sometimes overlooked byproducts of a SPAC listing process is actually there are few compliance checks to perform, because there isn't really a deep bench of managers and there are few operating entities or affiliates or subsidiaries to run compliance checks on. So, there are relatively fewer compliance checks performed in a SPAC process than there are for a "normal" IPO.

But, once an acquisition target is identified, ALL of the due diligence records searching for compliance risks that would have been required prior to a "normal" listing will be necessary.

For some SPAC managers this situation may create challenges, Particularly for those that initiated the SPAC process with a specific De-SPAC acquisition target in mind. SPACs will have a fiduciary responsibility to perform a level of compliance checks on their targets that will go far deeper than they may have experienced the first go-round.


Headline Risk is based on the concept that there are issues that may negatively impact a stock price if they wound up on the front page of The Wall Street Journal, but do not necessarily involve civil or criminal litigation or the breaking of any existing regulations.

As we discussed in SPACs202: Headline Risks are not typically something a computer or automated database report is ever going to cover, but is something that is extremely important. Often, when our team is thinking about risks contained within the data, our team will spend some time considering Headline Risk while preparing an executive summary.

During the De-SPAC process, Headline Risks will have to be reconsidered. Indicators of Headline Risk can relate these days to trends in ESG, in supply chain issues, and the evergreen issues of operational risks such as risks of fraud or corruption. So far, computers cannot deliver an automated report addressing these risks, and there remains considerable value for trained subject matter experts to review research results.

If you would like to learn more about how I-OnAsia's independent third party De-SPAC pre-transaction due diligence services add value for SPAC boards and their advisors, please CONTACT US.

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