The blank-check boom that made real many electric vehicle manufacturers’ dreams of going public may be nearing a close.
One such company, Faraday Future, is even in danger of being delisted, according to a filing with the U.S. Securities and Exchange Commission last week.
Faraday Future, Lordstown Motors, Lucid Motors, Nikola and Canoo — nearly all the EV manufacturers that took a shortcut to an IPO by merging with a publicly traded shell company — have faced SEC scrutiny, sending their once sky-high valuations tumbling.
Faraday makes for a cautionary tale. The beleaguered seven-year-old EV company, which has yet to launch a vehicle, went public by merging with a special purpose acquisition company (SPAC) in July last year.
However, just months later, a report from activist short-seller J Capital led to an internal investigation that resulted in pay cuts for its top two executives and the dismissal of others. Hindenburg Research, a New York-based investment firm, is another company that has sounded alarm bells for several other EV makers that took the SPAC route.
Chief among the investigation’s findings was Faraday had misled investors when it said it had received more than 14,000 deposits for its long-awaited FF 91 vehicle. In fact, many of those reservations were actually unpaid, passive indicators of interest.
When you fail to live up to your projections, you really get hammered. That’s when investors start filing lawsuits. John Loehr, managing director of automotive and industrial, AlixPartners
Last week, after the SEC subpoenaed several executives suspected of making other false claims, Faraday said the investigation could delay the filing of its 2021 annual report. Nasdaq said failure to comply with those guidelines puts the company in danger of being delisted from the stock exchange.
When boom goes bust
Over the past couple of years, a bevy of new EV companies — including startups yet to generate revenue or launch a commercial product — merged with SPACs to raise money to reimagine transportation and fulfill their visions of an electrified future. But analysts say that these once-promising businesses could soon be sold for parts — or fold altogether.
“Automotive manufacturing is not a business that’s friendly to new entrants,” said John Loehr, a managing director in the automotive and industrial practice at consulting firm AlixPartners. “You need significant production volumes to make money.”
“In general it takes between $1 billion and $2 billion to build a new car from the ground up. You can be two-thirds of the way done and run out of money.”
Electric truck company Lordstown Motors, which has yet to sell a product or earn revenue, is under investigation by both the SEC and the U.S. Department of Justice for allegedly misleading investors by inflating its production capabilities and the demand it sees. Its CEO, Steve Burns, resigned in June 2021 after an internal investigation discredited his claim that the company received 100,000 legitimate preorders for its pickup truck.
SPACs have served as a financial tool for decades, but only recently attracted the attention of EV makers that wanted to capitalize on the public’s newfound excitement around EVs. The arrangement allows startups, regardless of how much revenue they generate, to forgo the traditional IPO process and go public well before they’d otherwise be considered ready.
At their respective peaks, the first five EV makers to go public in this manner were worth $60 billion. But soon after, they lost $40 billion in market capitalization. Those companies — Nikola, Fisker, Canoo, Arrival and Lordstown Motors — have yet to deliver any vehicles to customers, and most have been investigated for misleading investors with inaccurate projections of demand and delivery dates.
Nikola, a battery-electric and hydrogen-powered truck maker, went public in 2020 with a nearly $29 billion valuation that rivaled Ford’s. But four months after boasting that he could “out-Elon” Tesla, co-founder Trevor Milton resigned following fraud charges stemming from an SEC investigation. Forced to cut its production forecast after paying a $125 million penalty, the company’s shares tumbled to below $10, less than what its blank-check merger partner had listed for.
It’s a pattern several founders, and their companies, have repeated.
“Once the promotional element is done, you don’t have nearly as much room for forgiveness as you would if you were venture capital-owned or privately funded,” Loehr said. “Now it’s all about a realistic path to revenue, not just preorders and intents.
“When you fail to live up to your projections, you really get hammered. That’s when investors start filing lawsuits.”
Luxury EV maker Lucid Motors, which went public last year at a $24 billion valuation, has distinguished itself from competitors by bringing its first model to market and receiving paid deposits for its 520-mile Lucid Air sedan. But Lucid, too, is under investigation by federal regulators for possible violations of the law.
Also under SEC scrutiny is Canoo, an EV startup founded by two former BMW executives that has delayed the timeline for its first vehicle by two years. Meanwhile, shares of Electric Last Mile Solutions fell to less than $1 in March after the company confirmed it was being investigated by the SEC.
“It seems that shareholders have started to understand how bad a deal a SPAC is for them,” said Stanford Law School professor Michael Klausner.
SPACs can be useful for smaller companies across industries, but EV makers face bigger hurdles because they operate in a space that is extremely capital-intensive. Moreover, they compete with established automakers, which have more time, money and infrastructure. Ford, Volkswagen, Tesla and many other brands have invested over $330 billion to develop EVs over the next five years, according to data from AlixPartners.
“I don’t think we’re going to see a lot more EV makers going public via SPAC,” Loehr said. “The last two or three years were a crazy anomaly, and there’s going to be a shakeout. I think investors will soon have a decent amount of buyer’s remorse.”
Correction: The short seller report that helped prompt the internal investigation into Faraday Future was from J Capital, not Hindenburg Research. Hindenburg Research has also issued reports into other EV SPACs.