Startups that make public through SPAC face fewer limits on stock promotion

Advertising and rapid growth forecasts have become routine aspects of IPO’s booming alternative to making public through SPACs. The use of so-called check-free companies, which go public without assets and then merge with private companies, increased in 2020, rising to a record $ 82.1 billion in 2020, up from $ 13.5 billion in 2019, according to Dealogic.

Startups that became public through SPACs, including many companies born without income, said they were drawn to the relative speed and certainty of the process, which can be completed a few months faster than some IPOs.

But as the instrument gains favor, there are concerns about regulatory differences between the two modes of advertising. According to venture capitalists and corporate governance experts, the prospect of attracting retailers through the media and inherent speculative projections poses an increased risk to stock market investors.

Because many of the companies are so young, the forecasts make them look very attractive, said David Cowan, a partner at venture capital firm Bessemer Venture Partners, who said he has short positions in several SPACs – which means he bets that stocks will fall from current levels. “These projections for the future are a loophole for the bumpers the SEC has put in place to protect investors,” he said.

The Securities and Exchange Commission is asking company executives to stay quiet for weeks during a public listing. Regulators do not want companies to market their shares to insensitive investors outside of a regimented process.

Similarly, companies generally do not include projections in IPO documents because of regulations that present them with a high risk of litigation if they miss these plans. Startups that become public through SPAC face fewer constraints because transactions are considered mergers.

The SEC did not respond to requests for comment. In September, SEC President Jay Clayton told CNBC that he was focused on ensuring that SPACs offer “the same rigorous disclosure” as IPOs.

Many of the companies that advertise through SPAC say they have been drawn to the process by readily available funding – not by regulatory differences.

For Fisker Inc.,

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a startup of electric vehicles that, in July, announced a transaction that will become public by merging with a SPAC, “the driving factor was the ability to raise money,” said a company spokesman. Differences in communication regulations did not affect the startup’s decision, he said.

Fisker has ambitious plans, but little in terms of product or revenue today to show investors. While it had about 50 employees last spring, it revealed projections to investors demanding that it reach $ 13 billion in revenue in 2025, up from zero in 2020. Founder Henrik Fisker went on television. cable repeatedly and remained prolific on social. After the announcement of the agreement – but before the completion of the merger at the end of October – Mr. Fisker wrote on Twitter about how the company was sold off reserves for the SUV it plans to build in 2022 and suggested about future news before an agreement was announced with a manufacturer.

Fisker’s spokesman said Mr Fisker did not trade individual investors and that his interviews were included in regulatory documents addressed to investors.

SPAC sponsors also went to great lengths to promote their companies. Venture capitalist Chamath Palihapitiya appeared on CNBC in September, revealing a merger between his SPAC and real estate company Opendoor, in which he cited the company’s expected revenue growth, among other factors.

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

The stock of its SPAC increased by 35% on the day of the announcement of the merger. Palihapitiya and Opendoor declined to comment.

Many executive officers of startups that make public through SPACs have resorted to more adapted locations.

After starting the Nikola hydrogen electric truck Body.

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said it will be made public through a SPAC merger in March, founder Trevor Milton conducted many interviews with podcast hosts and YouTube channels frequented by small investors. He talked about billions of dollars in future revenue the company expected and dismissed criticism from people who said Nikola’s expected valuation was too high.

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

Mr. MacDonald’s viewers grew – he has over 26,000 followers – and interviewed another public executive through a SPAC. Hope for others.

“Every half-interesting SPAC addresses these companies,” MacDonald said. He said it gives companies a chance to continue their interest with individual investors. “It will be an interview, but it is not difficult,” he said.

Public communications have contributed to frantic non-traditional investors.

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

“For me, it’s honestly pure speculation,” he said.

He said he tripled the initial investment before selling his shares this summer. In retrospect, he said he should have been more concerned about Mr Milton’s frequent tweets about stock prices, which “should have been a sign of danger”.

Nikola shares peaked in June at about $ 80 a share; closed the year at $ 15.26. Mr Milton resigned in September after a short salesman accused the company of distorting its technology. He and Nikola denied the allegations of fraud. The Justice Department has joined US regulators in examining allegations that Nikola misled investors by making exaggerated claims about his technology.

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

Write to Eliot Brown at [email protected]