The marriage between special-purpose acquisition companies and clean-tech vehicle startups is on the rocks as regulators push for detail on the one thing most of them lack: a solid business.
Stocks of electric-mobility companies such as Nikola Corp., Lordstown Motors Corp. and Romeo Power Inc. that went public by merging with SPACs are down at least 69 percent from dizzying peaks, as investors question whether their visions for a greener future are divorced from reality.
For months, the Securities and Exchange Commission has raised concern that investors aren’t fully informed of risks embedded in SPACs, also known as blank-check companies. The agency warned in early April that the safe-harbor provision — which allows sponsors, targets and others to make business projections — protects participants only from private lawsuits, not SEC enforcement. Republican Sen. John Kennedy of Louisiana introduced legislation to boost disclosures for SPAC founders.
A crackdown could chill the SPAC market, according to Carol Anne Huff, co- chairman of the capital markets practice at international law firm Winston & Strawn. “Forward-looking statements are sometimes wrong, and issuers need comfort to make projections on good faith,” Huff said.
Tighter rules would cut to the heart of the relationship between SPACs and green startups, which feed each other’s gauzy optimism. SPACs are publicly traded pools of money that seek to buy an existing company in a particular industry. Merging with an EV startup fulfills that goal, with an implied promise of big returns. The startup gets cash and protection — the safe harbor — to tell public investors about its business plan and the green revolution.
The SEC push for more substance jeopardizes this marriage of convenience. Already, SPAC filings dropped to about 30 last month, from February’s red-hot peak of 188.
The risk isn’t hypothetical. Even with the safe harbor, SPACs that target EVs and autonomous driving drew lawsuits more often than those in other industries, according to data compiled by Bloomberg Law. The research covered SPAC deals that were announced and closed in 2020 through the first quarter of this year.
SPACs have paved the way to public markets for at least nine electric-mobility players including EV makers, charging-station operators and battery developers since last year, with more coming.
For a budding industry with tremendous growth potential such as clean tech, projections are critical, because there’s no past performance to tout and sometimes no product on the market, said Daniel Gross, a Yale University lecturer and chief investment officer of Climate Real Impact Solutions.
“EVs are the future, but not today in terms of total penetration,” Gross said. “So if you can’t tell your story, how do you scale into a market that the investor community believes in?”
Sustainability-minded investors are skeptical about SPACs, given that the starting premise — you’ll find out what you own later — is antithetical to that style of investing, which champions transparency, said Erika Karp, chief impact officer at Pathstone, an advisory firm to wealthy families.
“Investors in SPACs take a big leap of faith for the sponsor; the sponsor takes another leap of faith in the company they buy,” Karp said. “There are lots of leaps of faith going on here.”
One dramatic blowup came from Nikola, which featured a colorful founder, Trevor Milton, and plans for an electric semitruck and hydrogen fuel.
Those helped Nikola forge a partnership with General Motors, which faltered amid accusations that Nikola misled investors. Nikola’s stock, which topped $93 last year, now hovers around $11.
A representative for Phoenix-based Nikola said it’s “executing on our long-term strategy and vision to be a global leader in zero-emissions transportation.”
Romeo, based in Vernon, Calif., declined to comment and Lordstown, named after the Ohio town where the company is based, didn’t respond to messages.
Buzzy trends also boosted the appeal of EV ventures, notably the rise of environmental, social and governance, or ESG, investment criteria. That’s apparent in the language of SPAC prospectuses, said David Pogemiller, chief of research company Boardroom Alpha. More than a third of 500-plus filings he studied included such passages.
Applying tenets of ESG investing, such as transparency and good governance, helps cut through the hype. Boardroom analyzed those filings and found just 43 had passages indicating serious intent, based on prominence, phrasing and frequency.
Among the top 10 ranked for intent are SPACs tied to former NRG Energy chief David Crane, including one that has a deal with charging-station operator EVgo; Riverstone’s Decarbonization Plus Acquisition SPACs, with one set to take public Hyzon Motors, a supplier of fuel cell-powered vehicles; and Peridot Acquisition, which is linked to lithium ion battery recycler Li-Cycle Corp.
Overall, “greener” SPACs outperformed. Those 10 firms averaged 18 percent gains from their initial public offering through April 23, beating the total group’s 3.4 percent, Boardroom’s data show. Whether investors will get pickier is another matter.
“There is a drive for ESG-branded products because fees are higher and investors don’t care, because there’s a perception they’re doing good for the world,” said Julian Klymochko, manager of a SPAC-focused exchange-traded fund at Accelerate Financial Technologies in Calgary, Alberta.