A capital storm is sweeping the American electric vehicle manufacturing industry.
In the past two years, American electric vehicle entrepreneurs, including Jia Yueting, took advantage of the regulatory gap of SPAC and took away billions of dollars in the secondary market with a PPT. Now, the SEC has decided to plug this loophole.
Recently, the US Securities and Exchange Commission (SEC) concluded a 60-day public consultation period and put forward some proposed guidelines for SPAC, especially those on disclosure, marketing practice and third-party supervision. If approved, the entry threshold of SPAC will be raised, and the gap between SPAC and the traditional IPO supervision will be narrowed. This probably means that this wave of SPAC "ebbs".
One of the main regulatory targets of this new policy is the American electric vehicle industry.Since mid-2020, the listing activities of SPAC have exploded. At present, more than 300 companies have been listed through merger with SPAC. Among them, the most popular field of SPAC is the electric vehicle industry. Nikola, Lordstown Motors, Lucid Motors, Karma, Fisker, Canoo, Hyliion, Proterra and Faraday Future are all listed through SPAC.
However, after raising a large amount of funds through SPAC, these car companies failed to fulfill their original performance promises, and even many car companies have not been able to mass-produce so far, so their stock prices have plummeted, causing investors to suffer huge losses.According to the data of research firm Audit Analytics, since the beginning of 2021, six companies, including Canoo, Faraday Future, Lordstown Motors, Nikola and Lucid, have disclosed that they have been investigated by the SEC, and at least three automobile or battery manufacturers have issued warnings of going concern.
SPAC is short for Special Purpose Acquisition Company, that is, special purpose acquisition company. The listing of SPAC refers to the establishment of a new cash shell company as the main body of listing, and the acquisition of one (or more) private companies with the raised funds after IPO to realize the curve listing of the private companies, so that the sponsors and investors of SPAC can realize the return on investment.
To put it simply, SPAC is the reverse operation of backdoor listing. First, the management team sets up a shell company without any business, then carries out roadshows, fundraising and IPO, and then looks for potential M&A targets within 12 to 24 months. Compared with traditional IPO, SPAC is attractive for its short cycle, low threshold and flexible trading.
In fact, the listing of SPAC is nothing new. Historically, US stocks have had two SPAC listing climaxes: the first time in 2007, and the second time since 2020. The environment of these two climaxes is somewhat similar: after the crisis, the Federal Reserve continued to implement loose monetary policy in order to stimulate the economy, and a large amount of funds poured in, which led to an increase in the valuation of enterprises in the capital market. The flexible mechanism design of SPAC allows open market investors to invest in the primary market and make higher profits, so the demand for SPAC has greatly increased.
To put it simply, the valuation of the secondary market is at a historical high, and the valuation premium of the primary and secondary markets is high, which makes the assets of the primary market more attractive. In 2021, the overall PE of S&P 500 was 32.49 times, which was in the historical 92.53% quantile. In 2020, the value multiple of S&P 500 enterprises will be 16.8X, reaching a historical high. This also means that the valuation of the secondary market is at a historical high level, which makes the assets in the primary market more attractive and enhances the motivation of private enterprises to go public for financing.
Then in this upsurge, electric vehicle companies have become the most sought after objects.As for the reason, this has to mention Tesla. Tesla’s share price has increased sevenfold in 2020, more than twice that of Toyota, the automobile giant. The high rate of return has stimulated investors, who are frantically looking for the "next Tesla".
At the same time, as countries around the world list the timetable for promoting the electrification of automobiles from 2030 to 2040, traditional automobile manufacturers continue to increase investment in new energy vehicles. More and more people expect that electric vehicles and trucks will soon begin to replace cars powered by fossil fuels.
For start-up car companies, building a car is originally a capital and technology-intensive industry, which requires a lot of money. Although they have their own vision, many companies have not yet developed prototypes, and it may be difficult for them to find investors if they raise funds through traditional IPO. Sam bursa Mead, an auto industry analyst at Guidehouse Insights, once said, "The problem of these companies is that many of them have not reached a certain level, and it is difficult to be truly considered as a highly feasible enterprise. 」
Therefore, in the face of the SPAC boom at that time, the best response of these electric vehicle companies is to strike while the iron is hot, take advantage of the optimism of current investors, and seize the opportunity to obtain financing quickly.
It is in this context that a large number of electric vehicle companies, such as Nikola, Lordstown Motors, Lucid Motors, Karma, Fisker, Canoo, Hyliion, Proterra and Faraday Future, went public.
This craze has even spread to other kinds of innovative means of transportation. According to statistics, in 2021, five flying car companies were listed through SPAC, including American flying car companies Archer and Joby, German flying car company Lilium, British flying car company Vertical, and flying car company Eve under Embraer.
However, just as the listing of SPAC was in full swing, the SEC began to strengthen supervision because it was aware of the "loopholes" in the SPAC rules.
Compared with IPO, SPAC listed companies can give forward-looking guidance to investors before listing, which is regarded as a regulatory arbitrage around the "safe haven" rule. The so-called "safe haven" principle is a rule promulgated by the United States in 1995. Listed companies mention some future plans in their disclosure information, and contain some standard wording, such as "note that our statement about the future may not come true", so even if the final result is not realized, investors can’t sue. Traditional IPO is excluded from the "safe haven" principle.
This provides SPAC with operating space. SPAC’s operation mode is to set up a shell company first, then raise funds to go public, and then find some high-quality assets to put into the shell within 12 to 24 months. Because the listing of SPAC has been completed, technically speaking, this transaction is a merger rather than an IPO, and the principle of "safe harbor" can be applied.Therefore, the management of many acquired targets can tell the company’s vision and convince investors that this is a good investment. Even if the final forecast is not realized, it is difficult for investors to sue listed companies.
In March 2022, the SEC published a draft regulation on SPAC, including five aspects. The most important change is that the financial statements required by SPAC should be consistent with those of traditional IPO, which is an important step towards creating more transparency. At the same time, the principle of "safe harbor" is no longer applicable to the disclosure of performance guidance information of SPAC company.
At the same time, there are a lot of insider trading such as information asymmetry, securities fraud and interest transfer in SPAC companies from listing to asset acquisition and injection. In particular, many SPAC companies can double their share prices by market rumors without substantial asset injection (acquisition of enterprises), which is highly speculative and makes a large number of investors admit their losses and leave.
Just as the SEC strengthened supervision, many listed companies began to expose problems. It is understood that because of the fiery concept of SPAC and electric vehicles, the share prices of many electric vehicle companies rose sharply at the beginning of listing, but later they were investigated by the SEC due to factors such as difficult fulfillment of mass production commitments, and their share prices subsequently performed poorly.
"Since 2021, many SPAC companies have deliberately exaggerated the performance and future growth space of the acquired assets in the process of acquiring assets, resulting in losses for the pursuers. An international hedge fund manager said.
Since listing, the share prices of these companies have fallen by 60% to 90% from the high point, which is far greater than the market fluctuation. Among them, Lordstown has the largest decline, approaching 95%. Its current share price is 1.54 USD/share, and its latest total market value is 313 million USD. Faraday Future (FF) share price is $2.27/share, down 89% from the high point ($20.75/share), with a market value of $686 million.
Among them, at the end of March 2022, Faraday announced in the future that some company management team members and employees were summoned by the SEC for allegedly releasing inaccurate information to investors. The US media speculated that this is related to Faraday exaggerating the number of reservations for its upcoming vehicle FF 91 to investors in the future.The investigation found that only a few hundred of the declared 14,000 FF 91 orders have been paid.
The financial report shows that the net loss of FF in the first quarter was about 153 million US dollars, compared with 76 million US dollars in the same period last year. By the end of the first quarter, FF’s total assets were about $706 million, including $276 million in cash. According to the company, part of the reason for the decrease in cash is the repayment of $97 million bills and accrued interest as planned.
In terms of orders, by the end of March 2022, only 401 users had paid a deposit of $1,500, and these deposits were not binding. If customers change their minds, they must return them in full.
In fact, this wave of start-up electric vehicle craze in the United States is somewhat similar to the "new power to build cars" that began to rise in China around 2016. At that time, there were nearly 300 automobile start-ups in China. For a long time, they were called "PPT cars" by the media because their cars were not mass-produced. Later, after big waves, there are only less than 10 such as Wei Xiaoli.
Although many American start-ups have been listed through SPAC, they will inevitably go through the process of shuffling. At the beginning, many start-ups saw Tesla’s great commercial success and began to try to enter the automobile industry. However, they underestimated the complexity and difficulties. Automobile is an industry that requires extremely high capital, technology and supply chain.
In this regard, Tesla CEO Musk said in an interview that "the history of car startups is terrible, and they are almost bankrupt. This is the graveyard of an incredibly large startup. There are hundreds of car companies that people have never heard of. At present, in the United States, the only two American auto companies that have not gone bankrupt are Ford and Tesla. Tesla almost went bankrupt many times, and I can’t count it. 」
At the same time, he also said, "These new car companies I saw rushed in and tried to produce a high-volume car without ever producing a car before. It’s like going to the Olympics without practicing your sports. You won’t win. This is crazy. You need to start small, make small-scale trial and error, and make sure that you have a large amount of reserve capital. Then gradually accumulate experience through the stupid things you did at the beginning. Over time, gradually reduce mistakes. Otherwise, it will bring huge financial losses. 」
In fact, the situation encountered by these start-up electric vehicle companies in the United States is not just a challenge for the company. On a larger scale, this is mainly because the United States no longer has advantages in supply chain and manufacturing, resulting in high manufacturing cost, low efficiency and poor quality.
Li Bin, CEO of Weilai Automobile, once said that Tesla once encountered a "productivity hell" around 2019, and life and death hung by a thread. There is basically no such thing in China. As long as there is a large order, if you give the car companies a few months, they will have no problem building multiple factories at the same time, and the parts manufacturers will also produce them for you if they work overtime, which will test the industrial and manufacturing foundation of a country. It is this difference that leads to the efficiency of Tesla’s China factory, which is much higher than that in the United States.
After the "sweet period" after SPAC went public, the new car-making forces in the United States will face the test of mass production and delivery, and they will usher in a real reshuffle in the increasingly involuted competition. However, judging from the global competition pattern, there is really not much time left for them to grow up.
This article comes from WeChat official account Geek Park (ID: geekpark) on WeChat. Author: Zhou Yongliang, editor: Zheng Xuan, and 36Kr are authorized to publish it.