Startups that go public through PSPCs face fewer limitations when it comes to promoting stocks

Advertising and forecasts of rapid growth have become routine aspects of the booming IPO alternative of using PSPCs. The use of so-called blank check companies, which go public with no assets and then merge with private companies, jumped in 2020, increasing to a record $ 82.1 billion in 2020, from 13. $ 5 billion in 2019, according to Dealogic.

Startups that went public through PSPCs, including many fledgling companies with no income, said they were drawn to the relative speed and certainty of the process, which can be completed months faster than some IPOs.

But as the tool grows in popularity, there are concerns about the regulatory differences between the two modes of IPO. According to some venture capitalists and corporate governance experts, the prospect of wooing retail traders through the media and inherently speculative projections results in increased risk for stock investors.

Because many companies are so young, the forecast makes them very attractive, said David Cowan, a partner at venture capital firm Bessemer Venture Partners, who said he has short positions in several PSPCs, which means let him bet stocks will fall. current levels. “These forward-looking projections are a loophole in the safeguards that the SEC has put in place to protect investors,” he said.

The Securities and Exchange Commission requires that company executives remain in a quiet period during the weeks surrounding a public listing. Regulators don’t want companies to market their stocks to unsophisticated investors outside of a regulated process.

Likewise, companies typically do not include projections in IPO documents due to regulations that put them at high risk of lawsuits if they miss those plans. Startups that go public through PSPCs face fewer constraints, as deals are considered mergers.

The SEC did not respond to requests for comment. Outgoing SEC chairman Jay Clayton told CNBC in September he was working to ensure that PSPCs offer the “same rigorous disclosure” as IPOs.

Many of the companies publicly traded through PSPC say they were drawn to the process by the readily available funding – not the regulatory differences.

For Fisker Inc.,

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an electric vehicle start-up that announced in July an agreement to go public by merging with a PSPC, “the determining factor was the ability to raise funds,” a company spokesperson said. The differences in communication 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. With around 50 employees last spring, it disclosed to investors projections that called for it to reach $ 13 billion in revenue in 2025, up from zero in 2020. Founder Henrik Fisker has been on TV by cable several times and remained prolific on social media. . After the deal was announced – but before the merger was completed at the end of October – Mr Fisker wrote on Twitter about how the company was sold without a reservation for the SUV it planned to build in 2022, and hinted at upcoming news ahead of the announcement of a deal with a manufacturer.

A spokesperson for Fisker said Mr Fisker does not market to individual investors and that his interviews are included in regulatory documents to investors.

PSPC sponsors have also taken to the airwaves to promote their businesses. Venture capitalist Chamath Palihapitiya appeared on CNBC in September, revealing a merger between his PSPC and real estate firm Opendoor, in which he cited the company’s expected revenue growth, among other factors.

“These guys will make nearly $ 10 billion in revenue” by 2023, he said, more than double the company’s revenue last year.

Its PSPC stock rose 35% on the day the merger was announced. Mr. Palihapitiya and Opendoor declined to comment.

Many CEOs of start-ups that have gone public through PSPCs have appealed to more suitable venues.

After starting the Nikola hydrogen electric truck Corp.

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Said it went public thanks to a PSPC merger in March, founder Trevor Milton has conducted numerous interviews with hosts of podcasts and YouTube channels frequented by small investors. He spoke of the billions of dollars in future revenue expected by the company and dismissed criticism from people who felt Nikola’s expected valuation was too high.

Jason MacDonald runs the YouTube fundraising channel JMac Investing, which he says attracts a host of individual investors interested in PSPCs. It only had a few thousand viewers this summer, but got an interview with Mr 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. “

Mr. MacDonald’s viewership has grown – he has more than 26,000 subscribers – and he interviewed another CEO made public through a PSPC. He hopes for others.

“Every half-interesting PSPC, I contact these companies,” said Mr. MacDonald. He said he provided an opportunity for companies to continue to attract the interest of individual investors. “It will be an interview, but it’s not impactful,” he said.

Public communications have helped bring some non-traditional investors into the frenzy.

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

“To me, it’s honestly pure speculation,” he says.

He said he more than tripled his initial investment before selling his shares this summer. In retrospect, he said he should have been more concerned with Mr Milton’s frequent share price tweets, which “should have been a sign of danger.”

Nikola’s stock peaked in June at around $ 80 a share; it closed the year at $ 15.26. Mr Milton resigned in September after a short seller accused the company of distorting its technology. He and Nikola have denied the fraud allegations. The Justice Department has joined with U.S. securities regulators to investigate allegations that Nikola misled investors by making exaggerated claims about his technology.

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

Write to Eliot Brown at [email protected]