Author | Zhou Yongliang
Editor | Zheng Xuan

A capital storm is sweeping the U.S. electric vehicle manufacturing industry.

In the past two years, American electric vehicle entrepreneurs, including Jia Yueting, have taken advantage of the regulatory gap of SPACs and swept billions of dollars in the secondary market by relying on a PPT. Now, the SEC has decided to close that loophole.

Recently, the U.S. Securities and Exchange Commission (SEC) concluded its 60-day public comment period with several proposed guidance for SPACs, particularly guidance on disclosures, marketing practices, and third-party oversight. If approved, the SPAC’s entry barrier will be raised, and the gap with the regulatory rigor of traditional IPOs will be narrowed. This is likely to mean that this wave of SPACs “ebbs.”

One of the main targets of this new policy is the U.S. electric vehicle industry. Starting in mid-2020, SPAC listing activity has exploded, with more than 300 companies now listed through mergers with SPACs. Among them, the most popular field of SPAC is the electric vehicle industry. Nikola, Lordstown Motors, Lucid Motors, Karma, Fisker, Canoo, Hyliion, Proterra, Faraday Future, etc. are all listed through SPAC.

However, after raising a large amount of funds through SPACs, these car companies failed to fulfill their original performance commitments, and even many car companies have not yet produced mass production, so their stock prices have plummeted, causing investors to suffer huge losses. Data from research firm Audit Analytics shows that 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 car or battery makers have issued going concern warnings.

01 SPACs, cash cows for electric vehicle startups

SPAC is the abbreviation of Special Purpose Acquisition Company, that is, special purpose acquisition company. SPAC listing refers to the establishment of a new cash shell company as the main body of the listing. After the IPO, the raised funds are used to acquire one (or more) private companies, so as to realize the curve listing of the private company, and the sponsors and investors of the SPAC realize investment returns. .

To put it simply, SPAC is the reverse operation of backdoor listing. First, the management team establishes a shell company without any business, and then conducts roadshows, fundraising, IPO, and then looks for potential M&A targets within 12 to 24 months. . Compared with traditional IPOs, SPACs are attractive because of their short cycle, low threshold and flexible transactions.

In fact, SPAC listings are nothing new. Historically, there have been two SPAC listing climaxes in US stocks: the first was in 2007, and the second was from 2020 to the present. The two climaxes occurred in a somewhat similar environment: after the crisis, the Federal Reserve continued to implement loose monetary policy in order to stimulate the economy, and a large influx of funds led to an increase in corporate valuations in the capital market. The flexible mechanism design of SPACs allows public market investors to invest in the primary market with higher profits, so the demand for SPACs 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, making the primary market assets more attractive. In 2021, the overall PE of the S&P 500 is 32.49 times, which is in the historical 92.53% quantile. The 2020 S&P 500 enterprise value multiple is 16.8X, an all-time high. This also means that valuations in the secondary market are at historically high levels, which makes primary market assets more attractive and boosts the incentive for private companies to go public and raise capital.

In this craze, electric car companies have become the most sought after objects. As for the reason, this has to mention Tesla. Tesla’s stock price has increased sevenfold in 2020, more than twice that of auto giant Toyota, and the ultra-high returns have stimulated investors, who are frantically searching for the “next Tesla.”

At the same time, as countries around the world list the timetable for promoting the electrification of vehicles from 2030 to 2040, traditional automakers are also continuing to increase investment in new energy vehicles. More and more people expect that electric vehicles and trucks Will soon begin to replace fossil fuel powered cars.

For start-up car companies, car manufacturing is inherently a capital and technology-intensive industry that requires a lot of capital. While they have their own vision, many companies have yet to develop a prototype car, and they may struggle to find investors if they raise money through a traditional IPO. Sam Abuelsamid, an auto industry analyst at Guidehouse Insights, once said: “The problem with these companies is that a lot of them don’t get to the point where it’s hard to really be considered a highly viable company. sex business.”

Therefore, in the face of the SPAC boom at that time, the best response for these electric vehicle companies is to strike while the iron is hot, capitalize on the optimism of current investors, and seize the opportunity to quickly obtain financing.

It is against this background that a large number of electric car companies such as Nikola, Lordstown Motors, Lucid Motors, Karma, Fisker, Canoo, Hyliion, Proterra, and Faraday Future have been listed.

The craze has even spread to other types of innovative vehicles. According to statistics, a total of 5 flying car companies will be listed through SPACs in 2021, including American flying car companies Archer and Joby, German flying car company Lilium, British flying car company Vertical, and Embraer’s flying car company Eve.

02 Why strengthen supervision?

However, just as SPAC listings were in full swing, the SEC began to tighten its oversight as it became aware of “loopholes” in the SPAC rules.

Compared to an IPO, a SPAC-listed company can make forward-looking guidance to investors before going public, which is seen as a form of regulatory arbitrage around “safe haven” rules. The so-called “safe haven” principle is a rule introduced by the United States in 1995. The public company’s disclosures mention some future plans and include standard language such as “note that our statements about the future may not come true”, so even if the final result does not materialize, investors cannot sue. Traditional IPOs are excluded from the “safe haven” principle.

This gives the SPAC room to operate. The operating model of a SPAC is to first set up a shell company, 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 SPAC listing has been completed, the transaction is technically an M&A rather than an IPO, and the “safe harbor” principle 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 doesn’t materialize, it’s hard for investors to sue public companies.

In March 2022, the SEC released a draft regulation for SPACs, including five major areas. The most important of these changes is the requirement to align the financial statements required by a SPAC with that of a traditional IPO, an important step towards creating more transparency. At the same time, the “safe harbor” principle is no longer applicable to the disclosure of SPAC company performance guidance information.

At the same time, from listing to asset acquisition and injection of SPAC companies, there are a large number of insider transactions such as information asymmetry, securities fraud and transfer of interests, especially many SPAC companies without substantial asset injection (acquisition of enterprises), relying on market rumors The stock price can double and rise sharply, which is highly speculative, causing a large number of investors to withdraw from the market.

At the same time as the SEC strengthened supervision, many listed companies began to expose problems. It is understood that due to the popularity of SPACs and electric vehicle concepts, many electric vehicle companies’ stock prices rose sharply at the beginning of their listings, but then they were investigated by the SEC due to factors such as the difficulty in fulfilling their mass production commitments, and their stock 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 those who pursue the gains.” An international hedge fund manager said.

Since listing, the stock prices of these companies have fallen by 60% to 90% from the high point, which is far greater than the volatility of the broader market. Among them, Lordstown has the largest decline, close to 95%, the current share price is $1.54/share, and the latest total market value is $313 million; Faraday Future (FF) stock price is $2.27/share, the high point ($20.75/share) fell 89% %, with a market capitalization of $686 million.

Among them, at the end of March 2022, Faraday Future announced that some members of the company’s management team and employees were summoned by the SEC for allegedly releasing inaccurate information to investors. US media speculate that this is related to Faraday Future exaggerating the number of pre-orders for its upcoming vehicle FF 91 to investors. The investigation found that only a few hundred of the advertised 14,000 FF 91 orders had been paid.

According to the financial report, FF’s net loss in the first quarter was about 153 million US dollars, and the net loss in the same period last year was about 76 million US dollars; as of the end of the first quarter, FF’s total assets were about 706 million US dollars, of which cash was 276 million US dollars. The company said the decrease in cash was due in part to the planned repayment of the $97 million note and its accrued interest.

In terms of orders, as of the end of March 2022, only 401 users had paid a deposit of $1,500, and these deposits are not binding and must be fully refunded if customers change their minds.

03 Behind the weakening of industrial advantages

In fact, this wave of start-up electric vehicles in the United States is somewhat similar to the “new car-making forces” that began to rise in China around 2016. At the time, there were nearly 300 automotive startups in China. For a long time, they have been called “PPT car builders” by the media because the car has not been mass-produced. Later, after the big waves washed the sand, only Wei Xiaoli was left with less than 10 restaurants.

Although many U.S. startups have gone public through SPACs, they are bound to undergo a reshuffle. At first, many start-ups saw Tesla’s great commercial success and began to jump into the auto industry. But they underestimated the complexity and difficulty involved. The automobile is an industry with extremely high demands on capital, technology and supply chain.

In this regard, Tesla CEO Musk said in an interview, “The history of car startups is terrible, and they are almost all bankrupt. This is a cemetery of unbelievably big startups. There are many Hundreds of car companies that people have never heard of. Currently, in the US, the only two US car companies that have not gone bankrupt are Ford and Tesla. Tesla has almost gone bankrupt many times, too many to count. already.”

At the same time, he also said, “I see these new car companies, they jump in, they’ve never made a car before, they’re trying to make a high-volume car. It’s like not practicing your sports. , go straight to the Olympics. You’re not going to win, it’s crazy. You need to start small, trial and error on a small scale, make sure you have a lot of reserve capital. Then build up experience by doing stupid things in the first place. Over time, make fewer mistakes. Otherwise there will be huge monetary losses.”

In fact, the situation encountered by these start-up electric car companies in the United States is not just a challenge for the company. On a larger level, this is mainly because the United States no longer has an advantage in supply chains and manufacturing, resulting in high manufacturing costs, low efficiency and poor quality.

Li Bin, CEO of Weilai Automobile, once said that Tesla once encountered “capacity hell” around 2019, and life and death hang on the line. There is basically no such thing in China. As long as there are large-scale orders, you can give car companies a few months, and they will have no problem building multiple factories at the same time. Parts manufacturers will work overtime to produce them for you. The test behind this is a country’s industrial and manufacturing foundation. It is this difference that has led to the efficiency of Tesla’s China factory, which is much higher than in the United States.

After experiencing the “sweet period” after the listing of SPACs, 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 introverted competition. However, from the perspective of the global competitive landscape, there is really not much time left for them to grow.

This article is reprinted from: https://www.geekpark.net/news/303908
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