Startups that are becoming public through SPACs face less limits in promoting actions

Publicity and fast-growing forecasts have become routine aspects of the growing IPO alternative of going public through SPACs. The use of so-called blank check companies, which go public without assets and then merge with private companies, skyrocketed in 2020, raising a record of $ 82.1 billion in 2020, compared to $ 13.5 billion in 2019 , according to Dealogic.

Startups that went public through SPACs, including many nascent over-the-counter companies, said they were attracted by the relative speed and certainty of the process, which can be completed months faster than some IPOs.

But as the tool gains preference, there are concerns about regulatory differences between the two ways to go public. The prospect of courting retail traders through the media and inherently speculative projections poses a high risk for stock market investors, according to some venture capitalists and corporate governance experts.

Because many of the companies are so young, forecasts make them 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 the shares will fall current levels. “These forward-looking statements are a breach for the guardrails the SEC has put in place to protect investors,” he said.

The Securities and Exchange Commission requires company executives to be silent for weeks over a public listing. Regulators do not want companies to sell their shares to unsophisticated investors outside of a regulated process.

Likewise, companies generally do not include projections in IPO documents because of regulations that put them at high risk of litigation if they lose those plans. Startups that go public through SPACs face fewer restrictions because businesses 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 offer “the same rigorous disclosure” as IPOs.

Many of the companies that are going public through SPACs say they were attracted to the process by the funding available – not by regulatory differences.

For Fisker Inc.,

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an electric vehicle startup that in July announced an agreement to go public through the merger with a SPAC, “the determining factor was the ability to raise money,” said a company spokesman. The differences in communications 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. Although it had about 50 employees last spring, it released projections to investors who were asking it to reach $ 13 billion in revenue in 2025, compared to zero in 2020. The founder, Henrik Fisker, appeared on cable television several times and remained prolific on networks social. Following the announcement of the deal – but before the merger was completed in late October – Mr. Fisker wrote on Twitter about how the company was sold through reserves for the SUV he plans to build in 2022, and hinted at the next news before an agreement with a manufacturer is announced.

Fisker spokesman said Fisker was not marketing to individual investors and that his interviews were included in regulatory investor records.

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

“These guys are going to generate almost $ 10 billion in revenue” in 2023, he said, more than double the company’s revenue last year.

Its SPAC shares rose 35% on the day the merger was announced. Palihapitiya and Opendoor declined to comment.

Many CEOs of startups who go public through SPACs have appealed for more personalized locations.

After starting the hydrogen electric truck, Nikola Corp.

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

Jason MacDonald runs YouTube’s finance 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 Milton in May, in which Nikola’s founder spoke about the company’s high valuation, saying: “The business model is there, the profitability is there”.

The number of MacDonald’s viewers grew – he has over 26,000 followers – and he interviewed another CEO who went public through a SPAC. He waits for others.

“Every SPAC is kind of interesting, I’m getting in touch with these companies,” said MacDonald. He said he is offering companies the chance to continue to pique the interest of individual investors. “It will be an interview, but it is not blunt,” he said.

Public communications helped to bring some nontraditional investors into the frenzy.

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

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

He said he more than tripled his initial investment before selling his shares this summer. In retrospect, he said he should be more concerned about Milton’s frequent tweets about stock prices, which “should be a danger signal”.

Nikola’s stock peaked in June at around $ 80; ended the year at $ 15.26. Milton resigned in September after a short seller accused the company of misrepresenting its technology. He and Nikola denied allegations of fraud. The Department of Justice teamed up with US securities regulators to examine claims that Nikola deceived investors by making exaggerated claims about his technology.

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

Write to Eliot Brown at [email protected]