Churchill Capital IV (NYSE:CCIV) has drawn a lot of interest from investors since announcing it would take Lucid Motors public. This has made CCIV stock a proxy for Lucid.
Lucid plans to take on Tesla (NASDAQ:TSLA) with scaled production of high-end electric cars in, among other places, Saudi Arabia.
All that is on hold thanks to the Securities and Exchange Commission, which may force the warrants in this deal to be called liabilities instead of equity.
CCIV shares peaked in mid-February at $58 but now are about $20. Even at that price they’re worth twice what there were when first issued in January.
What’s the Problem?
The trouble began April 8, when the SEC’s acting director of corporate finance, John Coates, questioned the use of projections in de-SPAC transactions. That’s what’s pending between Churchill and Lucid. The law’s safe harbor provisions, which let SPAC sponsors make predictions about future growth, “does not protect against false or misleading statements made with actual knowledge,” he wrote.
SPACs have been going through initial public offerings, then treating the de-SPAC transaction as an ordinary purchase. Coates wrote that the IPO requirements “may include de-SPAC transactions.” So much for just taking someone public by spouting off about them on CNBC.
On April 12, Coates and acting chief accountant Paul Munter issued another statement. This was on warrants. Warrants are options to purchase a SPAC target that are often part of SPAC deals. The warrants have generally been classed as equity. But they might be called liabilities if they’re indexed to the underlying stock’s behavior, Coates and Munter wrote. If the warrants include a cash-out provision, that too may force reclassification, the statement said.
What Happens Now?
The two statements aren’t final rules. But if they’re accepted, they could force de-SPACed companies to re-file their financial statements. The value of warrants would have to be re-evaluated each quarter. They would become less valuable to the private investors in public equity (PIPE) who join public investors in a de-SPAC deal.
There had already been uncertainty about CCIV. Our Vivian Medithi reported in March that the CCIV-Lucid deal didn’t come together over months, as originally reported. It happened in just 12 days. The process was described in a filing CCIV made to the SEC on March 19.
The Bulls Abide
There remain analysts who are bullish on CCIV and Lucid.
The deal as currently structured would give CCIV shareholders 16.4% of Lucid. This makes Lucid worth about $30 billion, based on CCIV’s April 22 market cap of $5.1 billion.
The Bottom Line on CCIV Stock
The SEC’s thoughts on SPAC accounting aren’t arcane. They strike at the heart of the SPAC concept.
SPACs typically put private investors ahead of public ones. They often account for warrants as part of the equity raise. SPAC sponsors routinely talk glowingly of their targets’ futures. Brokers running standard IPOs are required to keep mum.
Unless regulatory momentum is reversed, Lucid may have to re-state its results after the merger, accounting for the changing value of warrants. This will create uncertainty around Lucid’s stock value.
Chris Lau wrote recently that CCIV stock investors should be ready to stay in for five years. When I wrote about CCIV, I called it gambling. It’s hard to scale car production, and high-end cars are a niche market.
I maintain that view. I wouldn’t touch CCIV stock until well after the de-SPAC deal is done. Then I can see where all the warrants are and seriously evaluate Lucid’s chances.
At the time of publication, Dana Blankenhorn directly owned no shares, directly or indirectly, in any company mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.