SPAC Due Diligence Checklist — What Sponsors and PIPE Investors Will Ask For

SPAC due diligence is more compressed than a traditional IPO diligence process — and it covers different ground. The target company is being diligenced simultaneously by the SPAC sponsor, PIPE investors, underwriters' counsel, and the sponsor's own advisors, often over a 6–10 week window. Preparation matters enormously.

1. Financial Diligence

Financial diligence in a SPAC transaction focuses on audited and unaudited historical financials, financial projections (which are included in the S-4 and proxy in a way they are not in an IPO), and quality of earnings.

2. Legal & Corporate Diligence

Legal diligence in a SPAC is conducted by both the SPAC's counsel and the target's counsel. The legal team is simultaneously building the diligence file and drafting the S-4 — which means legal issues discovered late have direct S-4 drafting implications.

3. Commercial & Operational Diligence

PIPE investors in particular conduct thorough commercial diligence — they are making an investment decision with full information and require confidence in the business model and competitive position before committing capital.

4. Public Company Readiness Diligence

Unlike an IPO where the company has 12–18 months to prepare for public company obligations, a de-SPAC target often goes from private company to public company in 4–6 months. Sponsor and PIPE investors diligence readiness gaps specifically because they remain exposed to operating failures post-close.

Financial Due Diligence Areas

The SPAC's financial due diligence on a target company is broadly similar to M&A due diligence, but with additional focus areas driven by the de-SPAC regulatory framework:

• Quality of earnings (QofE) analysis: An independent QofE report — typically produced by an accounting advisory or transaction services firm — adjusts reported EBITDA for non-recurring items, normalizing adjustments, and accounting policy differences. The QofE is a foundation for the financial projections that will be disclosed in the SPAC proxy statement.
• Revenue recognition and accounting standards compliance: The target company's financial statements must be GAAP-compliant and audited. Non-compliant accounting or material weaknesses must be identified and remediated before the de-SPAC proxy is filed.
• Projection analysis: Unlike traditional IPOs, SPAC transactions can include forward-looking financial projections in the proxy statement. The SPAC's financial advisors must have a reasonable basis for the projections, which means validating the assumptions against historical performance and industry benchmarks.
• Working capital analysis: Confirming that the combined company will have adequate working capital post-close, especially given the uncertainty of SPAC share redemptions that could reduce available cash.

Regulatory and Legal Due Diligence

The de-SPAC transaction is a merger that must be approved by the target company's shareholders (if required) and may require regulatory approvals:

• HSR antitrust review: If the target company has revenues above the HSR thresholds, a Hart-Scott-Rodino filing may be required before the merger can close. Obtain HSR counsel's view early in the process.
• SEC review of proxy statement: The SPAC files a proxy statement (Form DEFM14A) with the SEC to obtain shareholder approval of the business combination. The SEC reviews this document with at least as much scrutiny as an S-1 — sometimes more, given the inclusion of financial projections. Allow 2–3 rounds of SEC comments and 4–6 months for the full review process.
• State gaming, financial services, or other regulatory approvals: If the target company operates in a regulated industry, industry-specific regulatory approvals may be required before the merger closes.

SPAC Due Diligence — What Good Looks Like vs. What Went Wrong

DraftKings — Thorough DD Enabled Clean Post-Close Period (2020)

DraftKings' SPAC due diligence is cited by practitioners as an example of what thorough de-SPAC diligence looks like in practice. The Diamond Eagle team conducted a comprehensive financial quality of earnings review (which confirmed DraftKings' revenue recognition was appropriate for a sports betting platform), a legal review of all state gaming licenses (critical given that DraftKings' business model required specific regulatory approvals in each state), a technology audit of the betting platform's reliability and scalability, and a review of the litigation history (DraftKings had faced daily fantasy sports regulatory challenges in multiple states). The completeness of the pre-close diligence meant there were no material post-close discoveries — no restatements, no undisclosed liabilities, no regulatory surprises — which contributed to DraftKings' strong post-merger stock performance in its first year as a public company.

Nikola — Due Diligence Failure, CEO Convicted (2020)

VectoIQ's diligence on Nikola did not include independent verification of the technology claims that were central to the company's valuation. The S-4 proxy statement included projections showing Nikola generating billions in revenue from hydrogen fuel cell trucks that were not yet commercially viable — projections that were supported by technology claims that a qualified engineering firm would have been unable to validate. Short-seller Hindenburg Research published a detailed technical analysis in September 2020 — three months after the merger closed — showing that Nikola's technology was far less developed than claimed. Founder Trevor Milton was convicted of fraud in 2022. The post-Nikola consensus among SPAC practitioners is clear: any target company making technology performance claims requires independent third-party technical due diligence as a condition of the merger agreement, not just financial and legal review.

Lordstown Motors — DD Missed Vehicle Pre-Order Question (2020)

DiamondPeak Holdings' due diligence on Lordstown Motors did not adequately investigate the nature and quality of the pre-order book that was central to the company's equity story and S-4 projections. Lordstown had reported thousands of non-binding pre-orders for its Endurance electric truck — a figure prominently featured in investor presentations and the S-4. Post-close, an internal investigation revealed that many pre-orders had been solicited through arrangements that overstated their commercial quality: orders were taken from individuals and small fleet operators who lacked the financial capacity to complete purchases. The SEC investigation that followed found that the pre-order disclosures were materially misleading. A diligence process that had verified the pre-order quality — requesting customer contracts, checking counterparty financial capacity, and confirming order terms — would have identified the problem before the merger closed.