Editor’s note: This article was updated on Feb. 2 to add that Trevor Milton has plead not guilty to mentioned fraud charges.
Renowned short-seller and founder of Muddy Waters Research Carson Block had some decisive words for special purpose acquisition company (SPAC) mergers today. Block went on Yahoo Finance Live this morning to discuss the rising popularity of SPACs. Block took particular aim at electric vehicle (EV) stocks, which have seen a number of high-profile SPAC mergers in recent years. On a day when Lordstown Motors (NASDAQ:RIDE) and Nikola (NASDAQ:NKLA) are up more than 3%, Block believes investors are missing the picture.
So, what do you need to know about Block’s SPAC rebuke?
Block’s major criticisms of SPACs are in reference to their structure. Block claims that SPAC promoters take home nearly 20% of ownership from most successful mergers. This means that roughly a quarter of the investments funneled into the recently public companies will be lost. Even worse, he says the statements made by the promoter to earn said investments are under little, if any, scrutiny whatsoever.
Block argues this kind of bad-faith negotiating is related to the lack of regulation SPACs have historically thrived off of. SPACs, unlike initial public offerings (IPOs), undergo a much lighter review process. This lack of oversight has allowed many promoters to run amuck with often baseless claims. Elaborating on this point, Block said:
“[I]f you’re going to bring a company public via IPO, you’re generally not allowed to make projections of future results. That’s called conditioning the market. That’s prohibited. Now, with the SPACs, though, because it’s not an IPO — the company already went public — it’s an acquisition of a business — they’ve made these projections that really have almost no basis in reality.”
Block believes EV companies are some of the biggest examples of this communication breakdown hurting investors.
Why Carson Block Thinks These EV Stocks Are ‘Valueless’
Block continued to make harsh comments about some of the biggest EV stocks.
“I mean, Lordstown (NASDAQ:RIDE) and Nikola (NASDAQ:NKLA). I think it’s a really interesting commentary on where we are today that these companies, which, I mean, the businesses — and I haven’t looked at them in any detail to be clear. But I think there’s a good chance that these businesses are essentially close to valueless when all is said and done.”
Nikola and Lordstown are two of the most well-known new EV SPACs making waves of late. Unfortunately, much of their fame stems from their controversies.
Lordstown and Nikola both saw their owners ousted last year after reports of fraud, related to false claims. In Lordstown’s case, the company allegedly lied on presale orders reports. This was a clear attempt to earn more money in its SPAC offering.
For Nikola, the company came under fire late last year after its founder, Trevor Milton, was arrested on fraud charges, which he has plead not guilty to. Prosecutors claim that Milton had gone on a spree propping up his electric truck startup. However, controversy came following the release of a key promotional video that appears to show a Nikola pickup truck driving down a road. In reality, the barebones frame was simply rolling down an incline.
While it seems Block’s claims regarding SPACs aren’t far from the mark, it’s still early into the trend. The future will surely tell us whether this latest public offering shortcut, and the companies that use it, are all they’re cracked up to be.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
