Like many, my reaction was: Surely not again?
While well-capitalized EV startups like Rivian Automotive Inc. and Fisker Inc. have steered free of controversy, a growing list of others has been targeted by short-sellers, class-action lawsuits and even federal investigations. Often the problems involved companies that completed blank-check mergers.
Once viewed as a low-hassle way to join the stock market, SPACs are earning a reputation as the most mistrusted Wall Street innovation since the collateralized debt obligation — and as a recipe for legal and regulatory bother. SPAC sponsors’ haste to strike deals has turned out to be the enemy of due diligence (surprise?), and their targets are failing to put in place rigorous controls and experienced management before joining the stock market.
These and similar events should embolden the U.S. Securities and Exchange Commission to improve SPAC deal underwriting and strengthen rules around disclosures and marketing practices. Otherwise, more clean-tech companies will find it harder to raise funds because investors won’t trust what they say. Given the huge amounts of capital needed to fund decarbonization, that’s something society cannot afford.
SPACs contributed half of the $29 billion raised publicly by EV manufacturers, suppliers and charging firms in 2021, according to BloombergNEF. They soared to giddy heights during the speculative fervor that gripped markets at the start of last year. But many of the firms they took public fetch a fraction of those values today. With interest rates set to rise, companies with no revenue (let alone profits) are suddenly unloved.
Making matter worse are regulatory investigations and questions over transparency. The most high-profile example was electric-truck maker Nikola Corp., whose chairman, Trevor Milton, was indicted over claims that he misled investors about the company’s technology. (He denies the charges.) In December, Nikola said it would pay a $125 million fine to resolve similar fraud allegations.
Like Faraday, Lordstown Motors Corp. last year acknowledged possibly inaccurate statements about the quality of its preorders. Absent revenues, customer commitments are an important gauge for investors assessing a company’s potential. However, such orders all too easy to hype. And several EV firms have abandoned the rosy financial projections they made prior to joining the stock market. Although all carmakers have been jolted by semiconductor supply issues, this has further undermined EV SPACs’ credibility.
Around 15% of all securities class action lawsuits last year involved SPACs, of which around one-third involved EV companies, according to one analysis.
SPAC founders will likely become more circumspect about taking EV companies public — if they’re able to raise money at all. Though hundreds of blank-check firms are still seeking merger targets, in the current environment they may prefer to pursue more established businesses that have a track record of revenue and perhaps even profits. Given the much less attractive valuations and the serious potential for legal bother, private startups too will be warier about partnering with a SPAC.
One problem the SEC aims to address is how there’s no formal underwriter role at the time a SPAC merges with its target, which may impair the quality of disclosures. But there are other ways the regulator could tone down the hype. It’s already told SPACs they shouldn’t assume they have a free pass to publish outlandish financial projections, which regular IPOs typically shy away from for liability reasons. Another area of concern is the (often long) time lag between when a SPAC publishes the flashy press release and slide deck announcing a deal and when it publishes the more sober, detailed prospectus.
Retail investors who bought into the hype have already learned a harsh lesson: When something sounds too good to be true, it often is.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
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