SPAC Death Spiral

Dear Rich Lifer,

Monday was a rocky day for Lordstown Motors, the upstart electric pickup truck maker, as its founder and C.E.O. Steve Burns and its C.F.O. Julio Rodriguez abruptly resigned.

The company already faced turmoil when a board investigation discovered “issues regarding the accuracy of certain statements regarding the company’s pre-orders” for its yet-to-be-released electric truck. 

The investigation also revealed that Lordstown does not have enough money to start making its truck, which has had trouble with prototypes burning down during testing. 

Shares were already down more than 40% in 2021 before Monday’s announcement, and following the breaking news, stocks plunged 19% and were down another 1% in premarket trading Tuesday.

Lordstown Motors went public last year via a special purpose acquisition company (SPAC), which usually allows companies to go public more quickly than they would be able to if they used a traditional IPO…

And without requiring as much transparency. Which begs the question…

Is Lordstown’s Meltdown the End of the SPAC Party?

The debacle didn’t just raise questions about the future of Lordstown Motors. 

It’s also put a spotlight on other start-ups that have merged with shell companies to list their shares on the stock market while avoiding the conventional initial public offering and the scrutiny that process brings.

We have seen this same pattern play out with other SPACs, including Nikola, whose chairman Trevor Milton stepped down last September, and Canoo, whose CEO Ulrich Kranz stepped down in April. 

Companies that sell stock in an IPO and the banks that help them go public are subject to strict reporting standards, while SPACs circumvent this process because they start with no operating business and therefore, have little to disclose. SPACs can rely on projections, which is not allowed with IPOs. 

This has raised concerns for regulators since SPACs have boomed in popularity over the past year. If you recall, SPACs were the hottest trend in early 2021, with 100 blank-check combinations worth $227 billion in the first three months of the year.

But the obsession with SPACs died down in the spring when “blank-check” firms (which raise money for investors and look for takeover opportunities) began facing more scrutiny from lawmakers and regulators. 

The Securities and Exchange Commission (SEC) is looking into SPAC regulations, including how SPACs treat projections. Some say that if projections either weren’t allowed or were better regulated, companies like Lordstown wound’t make it to the markets so quickly. 

However, Jay Ritter, an IPO expert, states there are “a lot of gray areas with the way IPOs and public companies report orders.” For example, in its SPAC merger proxy, Lordstown had disclosed that its pre-orders were nonbinding, and the SEC didn’t question those orders at the time of its SPAC deal. This means the issue of the order might have been missed by the SEC regardless. 

As we look forward, we must consider both the fate of Lordstown Motors and of SPACs in general…

Future of Lordstown 

Lordstown has appointed a new chairwoman Angela Strand. The company also announced that it had enough funds to continue to operate through May 2022 and remains on track to begin production of its electric pickup in late September. Customer deliveries are set to begin in early 2022. 

A scheduled event at Lordstown’s factory for next week, where investors and analysts will be presented with details about the pickups, is set to continue as planned.

The news rallied Lordstown stock, which increased 15% before leveling off at about $10 a share, up 8%. 

Strand, who was Lordstown’s lead independent director, is overseeing the transition until a permanent CEO is chosen.

And with the future of Lordstown already looking brighter, can the same be said for SPACs…

SPACs: Still Hot? 

Although there has been increasing skepticism over the use of SPACs to take companies public, it would appear that many firms are still willing to take the risk.

A Bank of America survey released on Tuesday revealed that 18% of global fund managers report that they are taking higher-than-normal risks, an increase of 4% compared to the previous month.

This quarter, there have been 54 SPAC mergers announced, totaling $122.7 billion.

Although this number is significantly less than the first quarter of the year, SPAC deals are still dominating the news.

Last week, Vertical Aerospace, a UK electric aircraft manufacturer, announced that it would go public by merging with the New York SPAC Broadstone Acquisition Corp.

Dave, a banking app, said it would merge with a SPAC financed by the investment firm Victory Park Capital.

On Monday, online grocery shop Boxed announced it was going public in an $887 million deal with a SPAC called Seven Oaks Acquisition Corp.

Bill Ackman, the hedge fund billionaire, also has an SPAC called Pershing Square Tontine Holdings that is said to be nearing a complex deal with Universal Music Group that would value the business at $40 billion.

The success… or failure… of these mergers will likely set the tone for how SPACs will continue to be perceived for the remainder of the year.

Regardless of their outcome, it’s important to remember that SPACs should be treated as a speculative investment, meaning you have a much higher risk of losing your initial investment. This means you should never use money you can’t afford to lose to invest in an SPAC. 

Make sure to mix in some low-risk investment in your portfolio; if you want to enter the SPAC world, this will help you alleviate your risk of loss. 

To a Richer Life,

The Rich Life Roadmap Team 

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