SPAC fantasies unravel for electric truck company Lordstown Motors
Based on its marketing, Lordstown Motors had everything any company would need to attract early money from investors. Echoing the global push for de-carbonization, the Lordstown, Ohio electric truck manufacturer touted that it would soon produce over 100,000 green vehicles in a year, and in the process create tens of thousands of jobs in the American Rust Belt.
But that’s very far from what was really going on. The company has failed to produce even a single truck, and recently announced itself as a “going concern” – finance speak for teetering precariously close to bankruptcy. Investors who took the company at its word are sitting on significant losses.
Unlike a company going public through the traditional Initial Public Offering (IPO) process, Lordstown Motors was one of many companies taken public in the last year or so through an acquisition by a Special Purpose Acquisition Company (SPAC).
SPAC issuers have been taking advantage of a loophole which their corporate lawyers are arguing makes them not liable for their “forward projections” – the things they tell investors they are going to do – even if they knowingly make false projections. The good news is that the SEC is now looking into this problem.
SPACs are often referred to as blank check companies because they raise money from investors without having any initial assets; the investors trust, with no specific information, the sponsors to merge with a private company that agrees to sell itself to the SPAC. This type of investment has been pitched hard to retail investors, playing to their hopes to get in on the ground floor with the next big company of the future.
When Lordstown Motors claimed on its August 3, 2020 filing with the SEC that it would bring in revenues of $5.8 billion by 2024 from producing 107,000 trucks the company had not produced a single truck and had generated no revenue. The electric truck manufacturer also claimed in that filing that it would not need additional capital to start production. The SPAC, which listed at $10/share, rose as high as $27/share by February 2021.
But then, on June 8 Lordstown Motors announced that it had had problems funding production of its electric trucks, sending shares sharply below their initial $10. The Securities and Exchange Commission (SEC) has now demanded information about the SPAC merger process as well as details about the supposed tens of thousands of pre-orders for Lordstown’s trucks.
Despite the losses for its shareholders, the SPAC sponsor that acquired Lordstown Motors – DiamondPeak Holdings Corp – is making out just fine. SPAC sponsors are awarded a percentage of the combined company (usually around 20%) for no cost upon a successful combination, often referred to as a “promote.”
Lordstown’s executives, despite providing investors with very optimistic projections, began slowly taking chips off the table after the company was acquired by DiamondPeak’s SPAC. They sold a total of $28 million in shares at between $16-$27/share.
Sadly, Lordstown Motors is not a unique case. It is one of many companies with no revenues that continue to think they can get away with baseless projections. A recent analysis by the Financial Times found that nine electric vehicle companies that have gone public through a SPAC collectively generated only $139 million in revenue in 2020 but projected combined revenues of $26 billion by 2024; revenues would have to grow 4651% over four years to reach those targets.
In a similar vein, both the Department of Justice and SEC are investigating another electric vehicle manufacturer, Nikola Corporation, which also went public through a SPAC in March 2020 and also has yet to sell a single vehicle. Its former CEO Trevor Milton sold $49 million worth of shares in March 2021, following accusations of fraud in September 2020.[1] During its merger with the VectoIQ SPAC Nikola claimed to investors that it would sell 600 electric trucks this year to generate $150 million in revenue. In fact, the company has yet to generate any revenue this year.
The debacle of Lordstown Motors underscores once again how important it is for the SEC to take action to shut down this loophole. SPACs are engaged in another version of selling securities to the public for the first time when they acquire companies with their investors’ money. That action should carry the same legal liability for deceptive projections that applies to IPOs. Perhaps then SPAC sponsors and issuers and executives at the companies they acquire would not simply cash out at the expense of small investors, but strive to run successful productive enterprises for the long term.
[1] Bushey, Claire. Financial Times. Nikola founder sells shares for $49m. Apr 2, 2021. https://www.ft.com/content/1989c5f9-eec1-49c8-8a75-e39205c04a3c