The Nikola Founder’s indictment informs different SPACs

Trevor Milton, founder and former CEO of Nikola Corp., leaves the Manhattan Federal Courthouse after performing in New York City, the United States, on July 29, 2021.

Eduardo Munoz | Reuters

Federal officials used the indictment against Nikola founder Trevor Milton to send a warning to Wall Street about two of its hottest areas of growth: special purpose vehicles and retail investors.

When announcing the charges, officials warned private investors not to allow “a friend or a quick-talking salesman” to persuade them to invest in a company. They also made it clear that SPACs are in their crosshairs. Milton became a billionaire overnight when he took his company public through a SPAC deal in June 2020. He pleaded not guilty Thursday in a Manhattan courtroom for allegedly defrauding investors by lying about “almost one aspect of the business.”

“This case concerns the obligation of corporate executives like Milton to provide complete, truthful, and accurate information at all times when discussing their company’s affairs,” Gurbir Grewal, director of the Securities and Exchange Commission, told reporters. “This obligation has no end or an exception. It applies to all listed companies, including those that have only recently entered the public market, including through SPAC transactions.”

Nikola is one of at least three electric vehicle start-ups that the federal prosecutor is investigating for potentially misleading investors. The others are Lordstown Motors and Canoo.

Officials involved in the investigation allege Milton abused the SPAC process by using social media and other media to constantly spread lies and misleading information about the company directly to retail investors.

They said Milton was obsessed with retail investors and their role in keeping Nikola’s stock price high. This included tracking the number of users of Robinhood, a popular social stock app, who held Nikola stocks.

“In executing his fraudulent plan, Milton took advantage of features of the SPAC structure that differ from a traditional initial public offering or initial public offering,” said US Attorney Audrey Strauss.

Defense attorney Brad Bondi said in an email Thursday that Milton was “wrongly charged following a flawed and incompetent investigation” and that justice will not be served until exonerated.

SEC and SPACs

The warnings to SPACs follow an intensified SEC scrutiny of such companies, which has proven to be an increasingly popular way for companies to go public over the past year.

Strauss said SPACs differ from traditional IPOs in that they do not have a dormant period before public trading begins. This allowed Milton to speak freely about the company on social media throughout the process of going public through a reverse merger with VectoIQ in June 2020, she said.

“During this time, Milton has brazenly and repeatedly made false and misleading claims about the status of Nikola’s technology,” Strauss said. “Milton told lies to drive demand for Nikola’s stock.”

SPACs are publicly traded companies that have no real assets other than cash. They are created as an investment vehicle with the sole purpose of raising funds and then finding and merging with a privately held company.

Grewal, who joined the SEC last month after serving as New Jersey attorney general, said the case shows corporate executives “can’t say what they want on social media regardless of federal securities laws “.

According to an internal investigation, Nikola said in February that Milton made several inaccurate statements from the company’s initial public offering in 2016 that misled investors.

Warning to retail investors

Federal agencies have warned investors about overvalued stocks.

“Use your gut instincts and double-check the details before making any type of investment,” said Philip Bartlett, chief inspector for the New York Division of the United States Postal Inspection Service. “If it doesn’t feel right, it’s likely a scam.”

Comments followed those of SEC Chairman Gary Gensler, who said in May the agency is investing significant resources in addressing emerging issues with SPACs, new ideas and recommendations related to SPACs, and how to adequately protect retail investors.

The explosive popularity of SPACs over the past year also attracted a number of celebrities who were new to Wall Street to hop on the bandwagon. The SEC previously cautioned against such deals being endorsed by public figures and urged investors to think twice before jumping in.

– CNBC’s Yun Li contributed to this story.