SPACs101: Intro to SPAC basics
What is a SPAC & What are the risks of investing in a SPAC? Here's an introduction.
I-OnAsia is an investigations company that conducts background checks for law firms working on behalf of issuers, sponsors, financial institutions, and investors. We look for operational and reputational risks: things like fraud or corruption or a negative history. Our team specializes in international checks, including many US-China deals involving SPACs.
We've been talking about SPACs for a while. Last year we published a blog about why background checks are important for SPACs. You can find a link to our prior interview of I-OnAsia’s Global Business Development Director Lingbo Jiang and some thoughts on market sentiment by clicking the story link here.
But what is a SPAC? What are the risks of investing in a SPAC?
Lets review & get on the same page.
2020 for most will be remembered globally for the impact that Covid-19 had on the world. But it will also be remembered by some for being an amazing year for Special Purpose Acquisition Companies (SPAC’s) growth.
With almost 65 billion dollars being raised in comparison to the nearly 68 billion dollars raised for IPO’s, the success of SPAC’s cannot be ignored going forward. It is anticipated that 2021 will follow the same trends as 2020. These figures are quite incredible, and have a lot of people asking especially investors, how does a SPAC actually work, and how can you compare it to an IPO? And more importantly, what are the risks….?
So, what is a SPAC?
SPACs are another way for companies to get late-stage growth capital, often described as a ‘blank check company’. SPAC’s have no formal operations with their sole aim of merging with another entity to take it public. SPAC’s are commonly formed by well-known and high-profile sponsors with funds being sought without the identified company to take public being known. It can take some time for the target to be identified, up to two years in some cases, and, if no company is identified within this time, the SPAC is dissolved, and the monies returned to investors.
Historically, SPAC IPO’s were never seen to be the high-quality deals of old, however, with this sudden resurgence, the need for background due diligence on the involved companies as well as the management teams within the SPAC’s remains as ever important to ensure that potential risks are known to investors and companies being approached to go public.
Why should you do your background check on a SPAC?
As with any investment, there are always risks, and pursuing a SPAC is no different, monies are often held in escrow whilst opportunities are identified. With a possible two-year timeline, investors need to be prepared to wait a little for a return on their investment. SPACS more recently are being lured to tech start-ups, the autonomous vehicle sector and the sciences, all of which have shown tremendous growth in their sectors.
With so many SPAC’s now looking for investment opportunities and their investment clocks nearing their two-year deadlines, naive investors may be forced to enter into a potentially bad deal as there are fewer due diligence requirements than that of the traditional and well-known IPO process. Making an impulse decision based on gut instinct rather than facts and a well-established due diligence product that provides a deep insight to allow for good decisions making based on factual information can lead to a disaster.
Thorough due diligence within any sector is critical with a potential investment opportunity, there are a number of examples historically where the people behind the companies, the boards, the management team and others haven’t been what was demonstrated on paper, and the only way this was discovered was through a thorough due diligence process.
What is a SPAC background check?
With any due diligence investigation, knowing what to look for and being able to interpret the information that is discovered is critical in ensuring investors are provided with comprehensive intelligence reporting which gives them the confidence to either invest, or walk away and avoiding unnecessary risk or loss.
From the time of engagement, I-OnAsia will typically require very straight basic background forward about the people and companies involved, and then the investigation will commence.
I-OnAsia has been one of the leading suppliers of Pre-IPO due diligence in Hong Kong for nearly 20 years now, and with over 17,000 completed cases in this time is extremely well placed to provide clients with the peace of mind that investigations that are undertaken, just don’t look at simple databases checks for answers to commonly asked questions?
Pricing depends on whether executive checks are just in USA or overseas in Hong Kong, China, Australia etc, and or involve multiple places.
International background checks can take 10 days as a normal service. A quicker 5 day express service is available.
I-OnAsia gathers critically important information, adding significant value in supporting a client’s decision-making process as to whether their investment is safe or not. Such areas include:
Ø Deal history.
Ø Professional networks.
Ø Knowledge of the sector.
Ø Operational experience being brought to the investment.
Ø Address & Contact verification.
Ø Litigation searches.
Ø Asset verification, if required.
Ø PEP Checks.
Ø Social Media & Media Analysis.
When we identify the warning signs before investing, we can assist clients avoid the potential dangers of reputational damage and the loss of a significant investment.
I-OnAsia ensures that all its investigations meet local regulatory compliance, and with in-house investigative and analytical teams collating the necessary data, clients feel at ease that I-OnAsia will provide a due diligence product which meets their needs and expectations from start to finish and is not merely a tick and flick exercise to satisfy a set of basic data points.
With SPACS you are investing in a management team, with no historical operations to validate or look back at past track records, carrying out through due diligence on the particular management team is crucially important in understanding their past successes and failures, so that the investor does not become part of the historical data of failures.
“You are the first one who noted this. Very thorough search”