Key Questions Clients Commonly Ask in De-SPAC Transactions

As the number of De-SPAC transactions continues to grow, so does the complexity of the issues our clients bring to us. We routinely advise SPAC sponsors, targets, boards, and investors who are navigating the transition from a private operating business to a publicly listed company. In today’s post, we wanted to discuss several questions we are frequently asked during De-SPAC projects—particularly those relating to director independence, revenue concentration, and related-party transactions. Although these questions may appear simple on the surface, they often involve nuanced regulatory interpretations under SEC rules, Nasdaq listing standards, and auditor requirements.

Below is an overview of three common questions and the preliminary guidance we usually provide.

Can An Individual Still Qualify as an Independent Director If Their Family Members Own Shares in the Public Company?

One of the most common concerns we hear—particularly from individuals nominated to serve on the post-combination board—is whether family ownership of the public company disqualifies them from being considered an “Independent Director” under Nasdaq rules.

The short answer: yes, a director may still qualify as independent even if close family members own a small amount of shares.

Under Nasdaq Rule 5605(a)(2), a director is considered independent if the board affirmatively determines that the individual has no relationship that, in the board’s opinion, would interfere with the exercise of independent judgment. The rule then provides a set of “bright-line tests” that automatically disqualify a director from being independent—these relate to employment relationships, compensation, current or past ties to auditors, and certain material payments.

Importantly, the rule does not state that mere ownership of less than 5% of the company’s shares by a “Family Member” disqualifies an individual from serving as an independent director. Ownership by a sibling, parent, or other covered relative only becomes relevant if it is connected to prohibited financial transactions or employment relationships.

In practice, this means:

• If a director nominee’s family members hold a small percentage of shares (e.g., under 5%), this alone does not impair independence.
• The nominee may still be considered independent as long as no other bright-line disqualifications apply.
• Boards should ensure they maintain clear documentation supporting the independence determination, especially during the review process associated with the De-SPAC transaction.

This is a scenario we encounter often, and in most cases, family ownership at low levels does not create an obstacle to serving as an independent director.

Can a Public Company Derive 100% of Its Revenue From a Single Related-Party Transaction?

Another recurring question is whether U.S. securities laws or Nasdaq listing standards prohibit a post-De-SPAC company from generating all—or nearly all—of its revenue from a related-party arrangement.

The technical answer: no specific SEC or Nasdaq rule outright prohibits this.

However, just because something is allowed does not mean it is simple or free of risk. A situation in which a company derives 100% of its revenue from a related party will trigger enhanced scrutiny by regulators, auditors, and the stock exchange. This issue is especially sensitive in the De-SPAC context, where disclosure standards and investor-protection concerns are magnified.

SEC Review

The SEC has already been applying heightened scrutiny to De-SPAC transactions, and related-party arrangements are a top-tier focus. If a target company’s revenue is entirely dependent on a related party:

• The SEC will expect robust disclosures throughout the registration statement.
• The reviewing staff will likely issue multiple rounds of comments, questioning the commercial rationale, pricing, independence, and sustainability of the revenue stream.
• The company should be prepared to justify the arrangement with objective evidence and comprehensive risk factors.

Although the SEC may allow the arrangement, companies must be ready for a more demanding review process.

Nasdaq Review

Nasdaq does not have a rule specifically prohibiting 100% revenue concentration with a related party. Nevertheless, Nasdaq Rule 5101 gives the exchange broad discretion over initial and continued listing to protect market integrity and public investors.

In situations involving extreme related-party dependence:

• Nasdaq will closely examine whether the issuer is operating a legitimate, independent business.
• Listing approval may involve significant back-and-forth and requests for supporting documentation.
• Ultimately, Nasdaq has the authority to deny the listing if it believes the risk to public investors is too high.

While a listing is still possible, companies should expect a more challenging review.

Auditor Review

Auditors must comply with PCAOB Auditing Standard 2410, which governs related-party transactions. This standard imposes:

• Heightened procedures,
• Additional verification requirements, and
• Enhanced documentation obligations.

Although auditors can sign off on such a structure, they will likely require detailed support to ensure the arrangement reflects arm’s-length dealings and economic substance.

Is There A Recommended Percentage Limit On Revenue Derived From Related-Party Transactions?

Clients often ask whether regulators provide a “safe harbor” percentage of revenue that may come from related parties—especially when aiming to minimize listing risks or reduce SEC scrutiny.

The reality: there is no bright-line threshold under SEC or Nasdaq rules.

That said, from a practical perspective, it is significantly easier to justify the business model if related-party revenues remain below 50%. While this is not a legal requirement, it is a common benchmark we discuss with clients because:

• A company with the majority of its revenue coming from unrelated third-party customers is more likely to be viewed as an independent operating business.
• The SEC and Nasdaq may have fewer concerns about conflicts of interest and long-term sustainability.
• Market and investor perception tends to be more favorable.

Even when related-party revenue accounts for more than half of total revenue, the transaction can still proceed. However:

• Disclosure obligations increase substantially.
• Auditors must conduct more probing reviews.
• Nasdaq’s discretionary authority becomes a significant factor in determining whether the post-combination company is suitable for listing.

In short, maintaining related-party revenue below 50% is helpful but not mandatory. Companies above that threshold must simply prepare for deeper scrutiny.

Conclusion

These three questions—director independence, related-party revenue concentration, and regulatory limits on revenue sources—are among the most common issues we address in De-SPAC engagements. Each requires a nuanced understanding of Nasdaq listing standards, SEC disclosure requirements, and practical considerations involving auditors and market perception.

Our firm regularly advises clients through every stage of the De-SPAC process, from structuring governance and preparing disclosures to navigating SEC and Nasdaq reviews. If you have questions about any aspect of a SPAC or De-SPAC transaction, we are here to help guide you through the complexities with clarity and confidence.

Contact Person: Nick L. Torres, Esq. and Zhiqi Zheng, Esq.