Startups that go public through SPACs face fewer restrictions when promoting stocks

Publicity and predictions of rapid growth have become routine aspects of the fast-growing IPO alternative to go public through SPACs. The use of so-called blank check companies, which go public with no assets and then merge with private companies, surged in 2020 and grossed a record $ 82.1 billion in 2020, compared to $ 13.5 billion in 2019, according to Dealogic.

Startups that have gone public through SPACs, including many emerging companies with no earnings, have said they were drawn to the relative speed and certainty of the process, which can be completed months faster than some IPOs.

But as the tool grows in popularity, there are concerns about the regulatory differences between the two ways of going public. According to some venture capitalists and corporate governance experts, the prospect of persuading retailers through the media and inherently speculative projections poses a higher risk to stock market investors.

Because many of the companies are so young, the forecasts make them seem very attractive, said David Cowan, a partner at venture capital firm Bessemer Venture Partners, who said he has short positions in several SPACs – meaning he is betting that shares will fall. of current levels. “These forward projections are a loophole on the crash barriers that the SEC has put in place to protect investors,” he said.

The Securities and Exchange Commission requires that corporate executives remain in a calm period during the weeks surrounding a public listing. Regulators do not want companies to market their shares to unaffected investors outside of a regulated process.

Likewise, companies generally do not include forecasts in IPO documents due to regulations that put them at high risk of litigation if they miss those plans. Startups that go public through SPACs have fewer restrictions because the deals are considered mergers.

The SEC did not respond to requests for comment. Outgoing SEC Chairman Jay Clayton told CNBC in September that he was focused on ensuring that SPACs would provide “the same rigorous disclosure” as IPOs.

Many of the companies that go public through SPACs say they were drawn to the process because of the readily available funding – not the differences in regulations.

For Fisker Inc.,

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An electric vehicle startup that announced a deal in July to go public by merging with an SPAC, “the driving factor was its ability to raise money,” a company spokesman said. The differences in communication rules did not affect the startup’s decision, he said.

Fisker has ambitious plans, but little in terms of product or revenue to show investors. Although it had about 50 employees last spring, it released projections to investors calling for revenue of $ 13 billion by 2025, up from zero by 2020. Its founder, Henrik Fisker, repeatedly took to cable television and remained productive on social media . After announcing the deal – but before the merger was finalized in late October – Mr. Fisker wrote on Twitter about how the company was sold out for the SUV it plans to build in 2022, hinting at the news before announcing a deal with a manufacturer.

Fisker’s spokesperson said Mr. Fisker was not in the market for individual investors and his interviews were included in regulatory filings to investors.

SPAC sponsors have also taken to the airwaves to promote their businesses. Venture capital investor Chamath Palihapitiya appeared on CNBC in September, unveiling a merger between its SPAC and real estate company Opendoor, citing, among other things, the company’s expected revenue growth.

“These guys will generate nearly $ 10 billion in revenue by 2023,” he said, more than double the company’s revenues last year.

Its SPAC’s stock was up 35% on the day the merger was announced. Mr Palihapitiya and Opendoor declined to comment.

Many CEOs of start-up companies going public through SPACs have turned to more bespoke venues.

After Nikola started up with hydrogen-electric trucks Corp.

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Said going public by a SPAC merger in March, founder Trevor Milton conducted many interviews with podcast hosts and YouTube channels frequented by small investors. He spoke of the billions of dollars in future earnings the company was expecting and rejected criticism from people saying that Nikola’s expected valuation was too high.

Jason MacDonald runs the YouTube financial channel JMac Investing, which he says attracts a crowd of individual investors interested in SPACs. It only had a few thousand viewers this summer, but he got an interview with Mr. Milton in May, in which Nikola’s founder spoke about the company’s high esteem and said, “The business model is there, the profitability is there.”

Mr. MacDonald’s viewership has grown – he has over 26,000 followers – and he interviewed another CEO who went public through a SPAC. He hopes for others.

“Any half-interesting SPAC, I contact these companies,” said Mr. MacDonald. He said he offers companies the opportunity to continue to spark interest among individual investors. “It’s going to be an interview, but it’s not difficult,” he said.

The public communication has contributed to the ban on some non-traditional investors.

Lukas Brown, a 19-year-old student studying business in southwest Norway, said he had invested in the SPAC that merged with Nikola last spring after seeing a tweet from Mr. Milton discussing Nikola’s plans to go public .

“To me it is really pure speculation,” he said.

He said he more than tripled his initial investment before selling his stock this summer. In hindsight, he said he should have been more concerned about the frequent tweets from Mr. Milton on the stock price, which “should have been a danger sign.”

Nikola’s share peaked at around $ 80 per share in June; it ended the year at $ 15.26. Mr Milton resigned in September after a short seller accused the company of misrepresenting its technology. He and Nikola have denied allegations of fraud. The Justice Department has joined with US securities regulators in investigating allegations that Nikola has misled investors by making exaggerated claims about his technology.

Nikola and a representative of Mr. Milton declined to comment on this article.

Write to Eliot Brown at [email protected]