Updated: Jul 6, 2021
What due diligence background checks are necessary for new directors and officers of new SPACs & What are the risks SPAC sponsors have a responsibility to consider? It depends.
I-OnAsia is an investigations company that conducts background checks for law firms and accounting companies 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.
As part of an ongoing series on SPACs, in this blog we delve into the slightly technical topic of Best Practices for Background Checks on SPAC Directors and Officers. If you would like to read a basic primer about what is a SPAC and what are the key risks of a SPAC, check out this blog: SPACs 101: Intro to SPAC Basics.
Who Should Be Performing Background Checks on SPAC Directors & Officers
We typically see background checks on SPACs performed by fiduciaries, or those who act on behalf of investors' interests. These may include members of boards of directors, or their legal counsel. Background checks may be performed before lawyers or accountants take on a SPAC as a new client. Due diligence on SPAC officers and directors can also be performed directly by fund managers and funds considering new investments in SPACs.
These stakeholders may need to perform due diligence and background checks on SPAC directors and officers because they have a professional or legal obligation to do so. For example, a lawyer or an accountant can lose his or her license to practice - or be sued, if a background check is not performed. Or a financial institution may want to discover risks and to protect an investment.
Sometimes even the SPACs themselves want background checks done, as a way of building market confidence - because a clean bill of health should mean lower risks to investors and improve investor sentiment (and boost shareholder value).
When Should Directors & Officers Background Checks Be Conducted & How Long Will A SPAC Director or Officer Background Check Take To Complete?
A background check on a SPAC director or officer usually takes an average of ten days to complete. In the US, rush checks can be completed in as quick as a day. International rush checks can be completed in five days or less. In some countries, a trustworthy background check would be completed in three weeks or more, because there are not reliable databases and checks need to be performed by hand, through visits to local records offices.
Our clients typically ask for background checks to be completed BEFORE a new director or officer is officially hired. Ideally, therefore, the due diligence process should therefore be started three weeks before any offer or public announcement is expected. Rush background checks services, can shorten this timeframe. (But rush services can carry additional cost).
What Are The Objectives of a SPAC Director or Officer Background Check?
All information in a SPAC prospectus must be complete and correct. If there is false information, the issuers and those supporting the issuers may be liable to investors for substantial damages. So, a SPAC due diligence on an officer or director must confirm information that will be provided about that person. It may sound simple, but there have been many instances where false statements about addresses or education or employment history have resulted in lawsuits and fines. A background check on a director or officer is a helpful fact check, and is very standard.
In today's world there are instances of very high profile and successful executives who have enjoyed alternative lifestyles or had sensational careers and colossal success stories mixed with disastrous prior commercial failures. These issues don't always matter to today's investors the way they used to. Today, the public values authenticity and leadership. So, an objective of a background check on a proposed SPAC director or officer isn't necessarily about finding a reason to say "no" to a nomination of anyone with a checkered past. An objective of a SPAC director or officer background check is to determine if the full legal, regulatory, and compliance related history of senior officers, equity owners or principals has been authentically disclosed - and verified as complete.
But it is no secret that there are laws, regulations, and market reasons in many countries that discourage doing business with convicted felons, or even individuals with negative litigation histories, negative public profiles, histories of regulatory sanction, etc. These are considered Red Flags or issues of potential concern, and the objectives of standard background checks on SPAC directors or officers include a review for these issues too.
How Do I Prepare To Get A Background Check on a SPAC Director or Officer Started?
The industry standard for background checks on SPAC directors or officers, is to include ALL senior officers of the company, ALL individuals who are key equity owners, and ALL other principals, which can include ALL board members and ALL key principals of any likely acquisition targets. As this list evolves and changes over time, ALL new key principals are the subjects of fresh background checks.
So, to get ready for a round of backgrounds on SPAC directors and officers, you should start to make a thorough list of who these people are. A chart showing the management structure and allocation of responsibilities can be helpful. You may wish to collect drafts of completed Shareholders Questionnaires and FINRA Questionnaires.
Some individuals will be more important than others, and some will require less effort in the diligence process. You should consider whether your list of individuals can then be divided into tiers.
Then, it is important to collect key biodata for use by the team that will perform the Investigative Due Diligence. The more information that can be shared with the team, the less expensive and more effective a SPAC background check on a director or officer is likely to be.
Ø Full name. Last name & Given names in English and any local language. Any aliases.
Ø Nationality. Identity number for that country (such as a Social Security number or ID).
Ø Date of birth.
Ø Current residential address.
Ø Other countries where subject individual has lived or worked.
Ø A professional bio or LinkedIn profile.
Ø Disclosure of any criminal record of litigation history or regulatory sanction.
In many projects, we see clients collect release and authorization forms from the subjects directly. Examples are available upon request.
What Should Be Included In A SPAC Director or Officer Background Check?
We love Google, but performing a background check on a SPAC director or officer involves much more than a Google Search!
When you are asking millions of dollars from investors, they are going to expect a better level of due diligence. So, what should be included?
Fortunately we live in a world where more and more of data about people's public profiles are being digitized and indexed. So, it is possible to get some basic verifications and litigation checks performed very efficiently.
Unfortunately (from the standpoint of you the potential customer requesting a SPAC director or officer background check), we live in a world where there isn't one single database for everyone. State or county or international litigation records might be in hundreds of different places. We also must deal with the fact that privacy laws may restrict data availability in some countries. Data on social media is also being created at exponential rates, and we have the issue of Dark Web activity, with advanced machine learning and data analytics tools still in early stages of development and far from automation. All of this is to say, what should be included in a SPAC director or officer background check is a thorough set of searches of relevant databases and records archives by a skilled due diligence specialist.
A skilled due diligence specialist for multi-national subjects will be experienced at conducting international searches and be able to perform due diligence in multiple languages simultaneously - because naming conventions for people differs from country to country, which has an impact on how the specialist will search for records. Performing research from a cross-cultural perspective can also help to avoid the biases of one country's media reporting or political landscape.
Key sections of a SPAC background check on a director or officer should at least include:
Ø Verification of collected information, such as on address history and identity numbers.
Ø Directorship information or business linkages and records.
Ø Media and public profile information, particularly any negative information.
Ø Results of litigation searches (both civil and criminal, and including bankruptcies and liens and judgements).
Ø Results of regulatory records searches - this is an art in and of itself, and subject for a later blog.
Ø An executive summary and risk profile
What Is Headline Risk & Why Is It Important?
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.
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.
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.