Preparing for SPAC mergers and IPOs with Luminance’s AI

17 September 2021 | Luke Taylor, Subject Matter Expert at Luminance

The use of SPACs – or Special Purpose Acquisition Companies – has grown dramatically over the past two years as an alternative to the traditional IPO. A Special Purpose Acquisition Company (SPAC) is a shell corporation or a “blank check company” that is listed on a stock exchange with the purpose of acquiring a private company, to make it public without going through the traditional IPO process. Key names that have gone public through SPAC mergers since the start of 2020 include Virgin Galactic, Opendoor and DraftKings. Indeed, the number of SPAC IPOs in the US increased by 320% in 2020 compared to 2019. SPAC mergers have grown in popularity for a number of reasons, including the fact that many suggest this route offers companies less dilution, lower fees, more transparency and fewer regulatory demands.

Indeed, activity generally on public markets over the last few years has been exceptionally high: SPAC mergers have been a key feature of 2020/21 markets, whilst more traditional IPOs have also boomed over the pandemic. With the entry of any company onto the public markets, pressure on the individuals undertaking the necessary due diligence reviews has increased, with lawyers often working to extremely strict deadlines. Adopting sophisticated AI like Luminance, that can rapidly analyse vast datasets and unearth the ‘skeletons in the closet’, has never been so vital.

The Challenges Facing Today’s Lawyers

Any IPO involves a rigorous due diligence process. Legal teams must pore over thousands – sometimes hundreds of thousands – of legal documents to gain a deep understanding of the business and, in particular, any risks contained within its contracts. And this is only getting harder as enterprise data continues to explode. Resorting to sampling methods in such cases carries a lot of risk and is often simply not an option. Indeed, if any of the information provided in the company prospectus is found to be false, both the issuers and the banks involved may be liable to the investors for substantial damages. For this reason, it is pivotal that all of the company’s documentation is thoroughly – yet quickly – reviewed.

In addition, ahead of an IPO, enterprises often take the chance to make corporate changes whilst they are still private and aren’t yet subject to additional scrutiny and disclosure obligations. Legal teams therefore have the dual task of reviewing all corporate documentation, which often covers multiple jurisdictions and complex regulations, and assessing whether any corporate changes, such as amendments to the corporate structure or governance policies, need to be made.

And particularly in the case of SPAC mergers, this vital due diligence exercise often has to take place in a much shorter timeframe than a traditional IPO, placing undue pressure on lawyers tasked with reviewing their vast datasets often in as little as three months.

Preparing for SPAC Mergers and IPOs with Next-Generation AI

AI is enabling lawyers to gain a comprehensive understanding of key information related to the company ahead of an IPO. Upon document upload, Luminance’s supervised and unsupervised machine learning automatically reads and forms an understanding of all documents contained in a dataset, irrespective of size, complexity or languages present. Key information such as clause or document types and governing laws are then displayed across a range of interactive dashboards, allowing lawyers to determine where to focus their review from day one.

Crucially, Luminance’s unsupervised machine learning automatically identifies anomalies present in the data room and categorises them by severity and type, allowing the lawyer to effectively prioritise their review. This includes the ability to identify the ‘unknown unknowns’ in the data room - the hidden risks that the lawyer did not were present and thus did not know to search for. This could be a missing document or a subtle deviation in clause wording. By providing this insight from hour one of the review, Luminance’s next-generation AI can expedite the in-depth reviews required for IPOs and SPAC mergers and allow lawyers to feel secure that no information has been missed.

Indeed, legal teams around the world have used Luminance to speed up and enhance due diligence reviews. For example, when faced with a set of 200,000 documents to review within a tight deadline, leading international law firm, Bird & Bird, decided to deploy Luminance’s AI. Where previously, they had only been able to review 79 documents per hour manually, they found that they could review 3,600 documents per hour using Luminance, which instantly identified hidden anomalies and risks contained within the dataset.

As Lee Eng Beng, Senior Counsel and Chairman of one of Singapore’s leading law firms, Rajah & Tann Asia, notably said: “Luminance is transforming the way in which lawyers conduct transactional work, particularly in the time-pressured field of M&A due diligence and initial public offerings.”