Special purpose acquisition companies (SPACs), which provide unique opportunities to raise capital from a diverse group of investors and invest in companies, are currently flourishing as investment vehicles. The United States remains the primary market for SPAC listings globally, and many Asian and European investors are piling into the U.S. SPAC market. In 2020 alone, investment firms in mainland China, Hong Kong, and Singapore raised billions of dollars on the New York Stock Exchange and Nasdaq via SPACs. In fact, by February 18, 2021, eight SPACs sponsored by Asian companies on U.S. exchanges had already outraised the total amount raised by SPACs in Asia in 2020. This rapid increase in funding has drawn the attention of other countries: as the SPAC trend reaches its apex in the United States, other jurisdictions, including the U.K., Hong Kong and Singapore, are exploring the vehicle.
However, SPAC investors and target businesses can raise national security and regulatory considerations, and in particular, the attention of foreign investment review mechanisms such as the Committee on Foreign Investment in the United States (CFIUS) and similar regimes in other countries. Market participants should ensure appropriate due diligence with respect to potential CFIUS reviews and timing considerations, particularly if the SPAC is investing in sensitive technologies, critical infrastructure, or companies that may handle substantial sensitive personal data, such as healthcare companies or businesses that develop mobile applications.
SPACs and CFIUS
As a result of the surge in U.S. SPACs involving foreign investors and because of the set acquisition timeframe, investors and target companies should be aware of how SPAC transactions could be impacted by foreign investment reviews conducted by CFIUS or other jurisdictional regimes. An interagency body of the U.S. government, CFIUS reviews foreign investments in or acquisitions of U.S. businesses for national security issues and, if national security issues are identified, can impose mitigation on such investments or acquisitions or, potentially, require that the transactions be unwound or prohibited. U.S. SPACs with foreign sponsors or foreign investors should understand how CFIUS review could impact the transaction—or face risks such as the collapse of a valuable deal or potential fines resulting from a failure to follow CFIUS requirements.
SPACs with Foreign Participants Should Evaluate CFIUS Risk
Broadly speaking, CFIUS jurisdiction may be triggered in each of the two phases of the SPAC process—during both the initial IPO and the subsequent de-SPAC process.
During the initial IPO, it is relatively unlikely that CFIUS would demand a national security review in relation to a foreign person’s initial investment in a SPAC. While it is unclear whether CFIUS could exercise its authority over a SPAC that has not engaged in investment activity, SPACs that have not undertaken operations or sales or investment activity in the United States are unlikely to present defined national security risks that would attract CFIUS interest. In this regard, the initial IPO could be viewed as an initial fundraise by a private equity or venture capital fund.
CFIUS is likely to exercise authority to review a de-SPAC transaction through which a foreign investor obtains either a controlling equity interest in a U.S. business or a non-controlling interest in a U.S. business that meets certain CFIUS requirements, particularly if the U.S. business is engaged in critical technology sectors, deals with critical infrastructure, or handles sensitive personal data.
As such, sponsors of or investors in SPACs should be aware that CFIUS may review de-SPAC transactions in certain circumstances:
This means that if through the transaction the foreign investor obtains a board seat on a TID U.S. business or involvement in substantive aspects of a TID U.S. business, CFIUS may have jurisdiction over the transaction. As a result, foreign sponsors and other SPAC participants may wish to consider at the outset of negotiations how their governance rights may implicate CFIUS jurisdiction. For instance, if a foreign person forgoes board seats, observer rights, or access to sensitive U.S. business information, the transaction may not fall under CFIUS jurisdiction.
CFIUS and SPAC Timeframes
SPACs may also wish to consider how the CFIUS process may affect their deal timeframe. The average SPAC generally takes an average of 15 months from IPO to find a suitable target, and an additional five months to complete a business combination. This five-month period should be weighed against CFIUS’s timeframe, which ranges depending on the type of filing parties make to CFIUS—either a joint voluntary notice or a declaration.
The chart below provides a comparison of the CFIUS timeframe for JVNs and declarations:
Joint Voluntary Notices
45-day Review Period
30-day Assessment Period
45-day Investigation Period (as needed)
15-day Extension (in limited circumstances)
15-day Presidential Review Period (as needed)
Potential Outcomes of the CFIUS Process
SPAC participants should be aware that there are many potential outcomes of the CFIUS review process. These outcomes may have significant consequences for the viability and value of a SPAC investment because CFIUS has broad authority, among other things, to prohibit or unwind an investment, to require the divestment of critical parts of the target company, to impose burdensome compliance frameworks, or to impose substantial costs on the acquired company through monitoring and oversight mechanisms. The outcomes of the CFIUS process can include:
Potential Penalties for Non-Compliance
Under the CFIUS regulations, parties can be subject to civil penalties for failing to submit mandatory filings or for violating a CFIUS mitigation agreement. These penalties can be severe, up to $250,000 or the value of the transaction, whichever is greater. For this reason, SPAC participants may want to consider how their investment may be impacted by the CFIUS process, particularly if they believe their investment is in a TID U.S. business that could trigger the mandatory declaration requirement.
CFIUS Diligence Protects Investment Value
Early and thorough CFIUS diligence helps market participants understand the risks inherent in potential SPAC targets and establish the compliance frameworks, business contingencies, and legal protections necessary to protect investment value.
Upon identifying a potential acquisition target, a SPAC with one or more foreign investors needs to conduct a comprehensive CFIUS review of the target company’s operations, technology, and current investors to determine whether CFIUS jurisdiction would be triggered upon a de-SPAC transaction. Likewise, a potential target company would also need to conduct proper diligence to assess whether it would be considered a TID U.S. business and to assess whether it engages in certain activities with respect to critical technology. This diligence would typically include performing an export control analysis to determine if the mandatory filing requirement would be triggered.
SPAC participants, including sponsors, investors, target companies, and law firms advising clients, can benefit from working with a third party that provides CFIUS services, such as due diligence. Because the clock starts ticking as soon as SPACs are listed, issuers and potential target companies need to be aware of potential CFIUS risks as quickly as possible to allow the acquisition process to go smoothly.