What Lordstown’s Meltdown Means for SPACs
Could regulators have stopped the electric car start-up’s implosion?
Could the S.E.C. have stopped the Lordstown implosion?
Lordstown Motors’ founder and C.E.O., Steve Burns, as well its C.F.O., Julio Rodriguez, abruptly resigned yesterday. The departures came as the electric vehicle manufacturer, which went public via a SPAC last year, said a board investigation had found “issues with the accuracy” of claims about orders for its yet-to-be-released electric truck. Shares of Lordstown fell sharply.
The Securities and Exchange Commission is looking into SPAC regulations, but last week said the review wasn’t due until April 2022. In the meantime, what, if anything, can be done to stop this from happening again?
SPACs allow companies to go public earlier than traditional I.P.O.s, in large part because they can rely on projections to tell a story they probably couldn’t by strictly relying on past numbers. (Such projections are not allowed in I.P.O.s.) That can be good for a biotech firm that needs capital for promising research, for example. But it can be dangerous for investors, by allowing start-up execs to spin stories about the demand for, say, electric flying taxis, even if the chance that those vehicles will be widely available is remote.
SPACs are structured such that sponsors are incentivized to get a deal done quickly, even if the company they’re buying may not be ready for public market scrutiny. With electric-vehicle SPAC deals alone, we’ve seen Trevor Milton step down as chairman of Nikola and Ulrich Kranz step down as C.E.O. of Canoo. Both companies have been unable to live up to their rosy projections and, like Lordstown, attracted S.E.C. investigations.
“You’re going to see more of this, frankly,” Tony Aquila, Canoo’s new C.E.O., told DealBook. “That’s the power of the SPAC right?” he said. “You can get to the public markets sooner — but that means you have to grow up in front of the public.”
The S.E.C. could have helped with some of the issues at play here. The commission has said it’s looking at how SPACs treat their projections. If projections weren’t allowed, or if rules forced executives to make more judicious promises, perhaps a company like Lordstown would not have made it into the public market so soon via a SPAC.
But SPACs aren’t the whole problem. Lordstown had disclosed that its pre-orders were nonbinding in its SPAC merger proxy. The S.E.C. didn’t question those orders in an inquiry into Lordstown’s disclosures at the time of its SPAC deal. Would it have been different if the company went public in a traditional I.P.O.? “There are a lot of gray areas with the way I.P.O.s and public companies report orders,” Jay Ritter of the University of Florida, an I.P.O. expert, told DealBook. The order quality issue at Lordstown “is not something that typically gets caught by auditors or in the I.P.O. process,” he said.