Lordstown's Struggles Raise New Fears About SPACs - The New York Times

Could regulators have stopped the electric car start-up’s implosion?

Or not. Megan Jelinger/Agence France-Presse — Getty Images

Could the S.E.C. have stopped the Lordstown implosion?

Lordstown Motors’ founder and C.E.O., Steve Burns, as well its C.F.O., Julio Rodriguez, abruptly resigned yesterday. The departures came as the electric vehicle manufacturer, which went public via a SPAC last year, said a board investigation had found “issues with the accuracy” of claims about orders for its yet-to-be-released electric truck. Shares of Lordstown fell sharply.

The Securities and Exchange Commission is looking into SPAC regulations, but last week said the review wasn’t due until April 2022. In the meantime, what, if anything, can be done to stop this from happening again?

SPACs allow companies to go public earlier than traditional I.P.O.s, in large part because they can rely on projections to tell a story they probably couldn’t by strictly relying on past numbers. (Such projections are not allowed in I.P.O.s.) That can be good for a biotech firm that needs capital for promising research, for example. But it can be dangerous for investors, by allowing start-up execs to spin stories about the demand for, say, electric flying taxis, even if the chance that those vehicles will be widely available is remote.

SPACs are structured such that sponsors are incentivized to get a deal done quickly, even if the company they’re buying may not be ready for public market scrutiny. With electric-vehicle SPAC deals alone, we’ve seen Trevor Milton step down as chairman of Nikola and Ulrich Kranz step down as C.E.O. of Canoo. Both companies have been unable to live up to their rosy projections and, like Lordstown, attracted S.E.C. investigations.

“You’re going to see more of this, frankly,” Tony Aquila, Canoo’s new C.E.O., told DealBook. “That’s the power of the SPAC right?” he said. “You can get to the public markets sooner — but that means you have to grow up in front of the public.”

The S.E.C. could have helped with some of the issues at play here. The commission has said it’s looking at how SPACs treat their projections. If projections weren’t allowed, or if rules forced executives to make more judicious promises, perhaps a company like Lordstown would not have made it into the public market so soon via a SPAC.

But SPACs aren’t the whole problem. Lordstown had disclosed that its pre-orders were nonbinding in its SPAC merger proxy. The S.E.C. didn’t question those orders in an inquiry into Lordstown’s disclosures at the time of its SPAC deal. Would it have been different if the company went public in a traditional I.P.O.? “There are a lot of gray areas with the way I.P.O.s and public companies report orders,” Jay Ritter of the University of Florida, an I.P.O. expert, told DealBook. The order quality issue at Lordstown “is not something that typically gets caught by auditors or in the I.P.O. process,” he said.

HERE’S WHAT’S HAPPENING

The U.S. and the E.U. reach a truce on airplane subsidies. The two sides will end a 17-year dispute over government support to Boeing and Airbus, a fight that led to a $12 billion tariff battle. As part of the deal, the two companies will develop future aircraft without subsidies.

Expectations for inflation rise. Consumers expect higher and faster inflation over the next several years, a new survey found, a potentially important signal as Fed officials meet this week to set policy. The hedge fund mogul Paul Tudor Jones recommended going “all in on the inflation trades” if the Fed stays its dovish course.

Investors bet that green energy’s rise will lead to higher oil prices. Some traders and analysts think that greater demand for cleaner energy will lead to less oil drilling, depressing supply and pushing up prices, The Wall Street Journal reports. Crude oil hit its highest level in over two years yesterday.

England postpones its “Freedom Day” as a new coronavirus variant spreads. Prime Minister Boris Johnson delayed the end of pandemic restrictions by four weeks. (Good news: Vaccines appear to protect against the variant, Delta, that is spreading in the country.)

Goldman Sachs plans to relocate traders to Florida. The Wall Street titan is in the early stages of moving more than 100 people — including veteran executives — to a new office in West Palm Beach, Insider reports. As with other financiers flocking to the Sunshine State, Goldman executives are drawn to lower taxes and warmer weather.

PwC gets into the trust-building business

This morning, PwC announced a series of investments and a major shift in strategy. The most eye-catching move is the professional services giant’s ambition to profit from teaching corporate executives how to be more trustworthy, DealBook’s Michael de la Merced writes for The Times.

PwC’s U.S. arm is founding the Trust Leadership Institute as part of a $300 million initiative to focus its business around the concept of “trust.” It is meant to teach clients how to handle issues such as transparency, ethics, data security, corporate governance, and politics and policy — without prescribing specific solutions. “Trust will define the next 10 years,” much as technology defined the past decade, Tim Ryan, PwC’s U.S. chairman and senior partner, told Michael.

• PwC’s U.S. arm also plans to commit $125 million to give 25,000 Black and Latino college students career coaching and mentoring, with a goal of hiring up to 10,000 of them at the firm itself.

• On a global basis, PwC will combine its accounting and tax services into a new division called — what else? — “trust solutions.”

It’s capitalizing on corporate America’s push to focus on more than profits. Ryan noted that the firm’s clients are increasingly open about feeling pressure to speak out on issues like the environment and social justice. Since many business leaders learn softer skills on the job, it leaves them in need of help to make decisions in a way that maximizes trust.

• Professional services firms have some experience with the need to rebuild trust, given their legal run-ins over issues like international tax shelters and the mixing of auditing and consulting services.

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“If you can go into a restaurant in New York City, you can come into the office.”

— James Gorman, Morgan Stanley’s C.E.O., on his firm’s preference that employees return to the office by Labor Day. More broadly, Wall Street is grappling with remote work: Most Goldman Sachs employees in New York City were required to return to the office yesterday, while Citigroup is leaning toward a hybrid model.

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Exclusive: Mexican fintech Credijusto is buying a bank

Credijusto, the Mexico-based fintech company, is acquiring the domestic bank Banco Finterra. The deal, which will create a company with a combined asset base of about $300 million, is the first time a Mexican fintech has acquired a bank in the country.

Buying a bank can be quicker than obtaining a fresh bank license, allowing a fintech to tap the lower cost of capital that banks enjoy. Similar deals elsewhere include LendingClub’s acquisition of Radius Bank last year and SoFi’s takeover of Golden Pacific Bancorp this year. John Mack, the former Morgan Stanley chief who invested in Credijusto, said that his advice in buying a bank was twofold: Be “pristine with regulations,” and impose “real discipline.”

Credijusto has the U.S. in its sights. The 2020 North America trade deal, combined with geopolitical tensions with China, has bolstered trade ties between the U.S. and Mexico. Credijusto, which caters to small businesses, is looking to take advantage with a new service financing invoices for the sale of Mexican products to U.S. buyers.

• The company may also open operations in the U.S. — initially as a non-bank player — and would consider buying a bank in the country, said David Poritz, one of Credijusto’s chief executives.

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Investing in political influence pays

The battle over ballot access is heating up this week as Texas Democrats who blocked a restrictive voting law meet with federal lawmakers in Washington to talk politics, money and law. Specifically, they are there to discuss the For the People Act, sweeping federal legislation that would expand voting rights nationwide and change campaign finance laws to reduce the influence of money in politics.

Most small-business owners support expanding voting access and restricting political spending, according to a new survey by the trade group Small Businesses for America’s Future. The poll, shared first with DealBook, was conducted in April and May after hundreds of mostly big business leaders signed statements opposing voting restrictions. Three-quarters of respondents to the survey supported expanding voting access. Notably, 86 percent also said political spending should be restricted. Big donors and recipients may beg to differ.

Every dollar spent on political influence yields a $20 return in future earnings, according to a new study of lobbying, PAC and trade group spending at more than 2,750 companies. This return is much higher than money spent on R&D or advertising, the study found. “No one has any interest in getting this out,” said Shivaram Rajgopal of Columbia Business School, one of the study’s authors. He said he believed that more disclosure would help everyone better understand how companies and politicians operate.

• Case in point? The corporate money flowing to Senator Joe Manchin of West Virginia — a centrist Democrat who is key to clinching a majority in the Senate — is under scrutiny after he voiced opposition to the For the People Act.

PAC donations are crucial for the Republican lawmakers who opposed certifying the presidential election results. A new analysis by the Leadership Now Project, which DealBook is first to report, examined 2020 campaign donations for 145 of the objectors and found that more than half received a quarter of their funding from corporate PACs. “If there’s one message to take away,” said Daniella Ballou-Aares, Leadership Now’s C.E.O., “it’s that business giving is one of the most powerful levers when it comes to safeguarding our democracy.”

THE SPEED READ

Deals

• Pandemic borrowing has left U.S. nonfinancial companies with $11.2 trillion in debt — nearly half the size of the American economy. (WSJ)

• Dan Loeb’s Third Point has amassed a stake in Vivendi as the French media company prepares to spin out Universal Music Group, in part to fellow hedge fund mogul Bill Ackman. (Bloomberg)

Politics and policy

• Which states are eliminating pandemic unemployment benefits, and when. (NYT)

• Two Republican senators introduced a bill that would ban most mergers that give a company a market share above 66 percent. (CNBC)

Tech

• A major investigation into conditions for workers at an Amazon fulfillment center in New York during the pandemic. (NYT)

• Here are the Didi Chuxing executives who could become billionaires after the I.P.O. of the Chinese ride-hailing giant. (Bloomberg)

• Britain is the latest country to probe the power that Apple and Google exert over their app stores. (Competition and Markets Authority)

Best of the rest

• The push for companies to take stands on social issues is putting pressure on their lawyers. (FT)

• Surveys show that up to 40 percent of workers are considering quitting, either to find a new postpandemic career or to seek an employer with better remote-work policies. (Axios)

• Country-hopping remote work could saddle workers with headache-inducing tax issues. (Bloomberg)

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