Underwriter Selection and SPAC Success: Strategic Alignment, Execution Risk, and the Chenghe Acquisition III Case

The removal of CBC Securities from Chenghe Acquisition III Co.'s underwriting team in July 2025 marks a pivotal moment in the evolution of SPAC underwriting practices. This decision, driven by conflicts of interest and regulatory scrutiny, underscores the growing importance of strategic alignment between SPAC sponsors, underwriters, and investors. As SPACs navigate a post-2025 market characterized by heightened regulatory expectations and investor skepticism, the choice of underwriters is no longer a mere procedural step—it is a critical determinant of capital-raising efficiency, market perception, and long-term success.

The Chenghe Case: A Microcosm of SPAC Underwriting Challenges

Chenghe Acquisition III Co., a Cayman Islands-based SPAC, removed CBC Securities from its IPO underwriting team amid concerns over affiliations with co-sponsors and management. Houston Li, the SPAC's Chief Operating Officer, is an associate at CBC Securities, creating a direct conflict of interest under FINRA Rule 5121. This rule mandates that underwriters with conflicts must disclose such ties and avoid discretionary trading in accounts they manage. By removing CBC Securities, Chenghe aimed to mitigate regulatory risks and restore investor confidence in its $110 million IPO.

The decision highlights a broader trend: SPACs are increasingly prioritizing transparency and governance to address the erosion of trust following the 2021-2022 SPAC boom and subsequent litigation wave. For instance, the SEC's 2024 final rules on SPAC disclosures and the rise of fiduciary duty lawsuits in Delaware have forced sponsors to scrutinize underwriter relationships more rigorously. Chenghe's restructuring of its underwriting team reflects a strategic shift toward compliance and risk mitigation, even if it means sacrificing a familiar partner.

Strategic Alignment: The New Benchmark for Underwriter Selection

The Chenghe case illustrates that underwriter selection is now a strategic, not just operational, decision. SPAC sponsors must align with underwriters who:
1. Avoid Conflicts of Interest: Affiliations with sponsors or management teams can compromise objectivity, leading to regulatory scrutiny and investor distrust.
2. Bring Sector Expertise: Underwriters with deep knowledge of the target industry can enhance deal execution and post-merger performance.
3. Support Long-Term Governance: Underwriters that prioritize robust D&O insurance, shareholder rights, and post-merger transparency are better positioned to navigate litigation risks.

For example, the rise of “SPAC 4.0” models—where institutional investors co-fund SPACs in exchange for sponsor economics—has further complicated underwriting dynamics. Institutional backers now demand underwriters who can balance sponsor interests with investor protections, a challenge that Chenghe's removal of CBC Securities may have preemptively addressed.

Execution Risk and Capital-Raising Efficiency

The removal of CBC Securities also raises questions about execution risk. While the move aligns with regulatory best practices, it could signal underlying concerns about the underwriter's capability to manage the IPO effectively. For instance, CBC Securities had already received a $50,000 structuring fee and $2,000 in underwriting commissions before its removal, suggesting it played a role in shaping the offering's structure. Replacing an underwriter mid-IPO introduces operational friction, potentially delaying the process or increasing costs.

However, the broader market appears to view such adjustments as a necessary cost of compliance. In 2025, SPACs raising $100–200 million (as opposed to the pre-2022 $300–500 million norms) are prioritizing leaner capital structures and faster execution timelines. Chenghe's decision to restructure its underwriting team aligns with this trend, as sponsors seek to streamline processes and avoid regulatory roadblocks.

Investor Confidence and Market Perception

Investor confidence in SPACs remains fragile. Post-2025, only 17% of de-SPAC'd companies face lawsuits, but the reputational damage from high-profile failures (e.g., Nikola, Cloverly) lingers. Chenghe's removal of CBC Securities could be interpreted as a positive signal: a SPAC willing to self-correct to meet investor expectations.

Yet, the decision also highlights the inherent tension in SPAC underwriting. Sponsors must balance the need for experienced partners with the risk of conflicts. For example, BTIG, LLC, the lead underwriter in Chenghe's IPO, has no such affiliations and is likely to be perceived as a more neutral party. This shift toward “clean” underwriting teams may become a standard in 2026–2027, as investors demand clearer separation between sponsors and underwriters.

Data-Driven Insights: SPAC Underwriting Trends

The data reveals a declining trend in underwriting fees (from 5–7% in 2020 to 2–4% in 2025), reflecting a more competitive and risk-aware market. Redemption rates, meanwhile, have stabilized at 15–20%, indicating that investors are exercising caution but not abandoning SPACs entirely. These metrics suggest that SPACs with transparent underwriting teams and strong governance structures are better positioned to attract capital.

Investment Implications

For investors, the Chenghe case offers several lessons:
1. Scrutinize Underwriter Affiliations: SPACs with underwriters linked to sponsors or management should be approached with caution.
2. Prioritize Governance Metrics: Look for SPACs with clear redemption rights, extended completion windows, and robust D&O insurance.
3. Monitor Regulatory Developments: The SEC's evolving stance on SPAC disclosures and conflicts of interest will shape underwriting practices in 2026–2027.

For sponsors, the takeaway is clear: underwriter selection is a strategic lever that can either amplify or mitigate execution risks. Chenghe's decision to remove CBC Securities, while costly in the short term, may ultimately enhance its credibility in a market where trust is the scarcest resource.

Conclusion

The removal of CBC Securities from Chenghe Acquisition III Co.'s underwriting team is more than a procedural adjustment—it is a symptom of a maturing SPAC market. As sponsors and underwriters navigate the delicate balance between compliance, execution, and investor trust, the lessons from Chenghe's experience will resonate across the capital markets. In an era where strategic alignment and governance are paramount, the SPACs that thrive will be those that treat underwriting not as a transactional necessity, but as a cornerstone of their long-term value proposition.