Special purpose acquisition companies (SPAC) just cannot get a break for now. VectoIQ Acquisition Corp, the SPAC that is now trading under the more familiar name of Nikola Corp, was the subject of a negative report by Hindenburg Research. No surprise then that Nikola’s share price fell, forcing its founder and executive chairman Trevor Milton to step down on Sept 20.
Hindenburg Research alleged that one of Nikola’s promotional videos Nikola One in Motion involved towing a truck to the top of a hill on a remote stretch of road and filmed it rolling down the hill. The video was then rotated to look as if the truck was moving on flat terrain. Nikola One in Motion was meant to demonstrate how intelligent the company’s trucks are. Hindenburg also claimed that Nikola’s proprietary technology was purchased from another company.
Nikola produces environmentally-friendly heavy-duty trucks. Some market watchers saw it as a peer to Tesla whose shares touched new highs this year. Both companies are named after Nikola Tesla, the famous physicist and engineer of the early 20th century who designed the alternating current.
The injection of the then Nikola Motor into VectolQ took place in June, positioning Nikola as a competitor to Tesla. On Sept 8, General Motors Company (GM) agreed to acquire 47.7 million Nikola shares for US$2 billion ($2.7 billion). Following Milton’s departure, Stephen Girsky, a former vice-president of GM, has taken over as chairman. Some investors are already calling Nikola “Wirecard with wheels”.
An immediate fallout of Hindenburg’s short-selling report could be regulators getting tougher on due diligence for both SPACs and the businesses and companies to be injected into them. The way SPACs and their injections work currently may imply less oversight of the acquisition company that is injected into the SPAC.
Risks for Singapore promoters
Promoters like James Mengdong Tan are unfazed, despite the negative and undoubtedly cautious sentiment on SPACs. Tan, who listed his SPAC, 8i Enterprises Acquisition Corp, last year, is injecting Diginex, a Hong Kong-based company that operates a crypto exchange and manages two funds.
Isn’t this likely to damage 8i Acquisition Corp’s prospects? “Although the news around Nikola is negative, in the medium term, the JFK/EQOS price will be determined by how Diginex’s management moves forward with its milestones and how bitcoin performs,” Tan says. JFK is the ticker for 8i Enterprises Acquisition, and EQOS the ticker for Diginex once it has been injected into 8i.
After Diginex is injected into 8i Enterprises Acquisition, the unit will change its name to Diginex, whose cryp-to exchange is EQUO.io, hence the new ticker.EQUOS.io operates out of Singapore and has been granted an exemption from holding a licence under the Payment Services Act in Singapore, allowing it to continue operations until a decision is made on their recent licence application later this year.
Most recently, VG Acquisition Corp, a Cay-man-registered SPAC filed for an initial public offer with the US Securities and Exchange Commission. VG Acquisition plans to raise US$400 million by offering 40 million units at US$10. Each unit consists of one share of common stock and one third of a warrant, exercisable at US$11.50. At the proposed deal size, VG Acquisition Corp. would command a market value of US$500 million.
The company is led by CEO Josh Bayliss and CFO Evan Lovell, who serve as CEO and CIO of Virgin Group which is controlled by Richard Branson. It remains to be seen what VG Acquisition will acquire given that Branson offered to mortgage his island to support Virgin Atlantic and Virgin Australia which is currently suspended.
Less well known is a SPAC which was listed in August. Vistas Media Acquisition Company (VMAC) raised US$100 million in an IPO on Nasdaq. Abhayanand Singh, co-founder of VMAC, says, “In a normal IPO, I have a business and I do a public listing to raise money and use it to grow the company. In a SPAC, it is the other way round. I list the company and raise money. Hence it’s a blank-cheque company. The money raised is put into a trust account which I can’t touch. It is for an as-set buyout.”
Who invests in SPACs?
“Investors are usually hedge funds in the US. In our SPAC, we had 10% to 15% retail par-ticipation. SPACs have seen increasing partic-ipation of retail investors which used to be primarily hedge funds and private equity,” Singh replies.
Usually, two categories of hedge funds invest in SPACs. “Arbitrage investors will trade my warrants as their mandate is arbitrage. The income investors stay put till the business combination is done and then they exit. There are also long-term hedge funds that look at longer term value creation and we’ve got some of those. They have a final call to make once we present the business combination,” Singh explains.
Before VMAC could be listed, it had to file a prospectus. It will probably buy a company in North America and its mandate is to acquire a company in the media entertainment sector within around 18 months.
“In a US$100-million SPAC, you need to look at an enterprise value (EV) of 3–5 times of the SPAC. We have to look for US$300 mil-lion to US$500 million of enterprise value [to inject],” Singh elaborates. As as a result, the original SPAC investors can decide and vote on the acquisition as they will get diluted. “Investors are willing to be diluted,” Singh claims.
“If I identify a US$400 million company, the owners of that company are rolled into the SPAC and will own 80% of the SPAC. If our equity was US$100 million, our investors can only have 16% of the SPAC,” Singh recounts. “Investors believe whatever company reverses into the entity, the combination will grow.”
After the combination, the warrants are usually redeemed or converted into public shares. For example, Nikola Corp’s combination was announced on June 3, and on July 22, the company announced redemption or conversion of warrants to mother shares.
According to SPAC Research, last year, more than 50% of funds raised in the public markets in the US was through SPACs in terms of volume and value, and a similar trend is developing this year.
“The SEC made sure all the loopholes have been addressed. We went through a normal IPO process by filing a prospectus. In step 2, we will seek approval from shareholders for the business combination. So the notions that SPACs are scams have alleviated,” Singh says. For instance, if the business combination is at a cheaper valuation than investors would otherwise have found, that would make sense to them.
Singh cites Draftkings, a sports betting and iGaming company that was acquired by a SPAC, Eagle Diamond Acquisition Corp, in April. So far so good for Draftkings, although it has yet to turn a net profit. The company has a dual-class shareholder structure comprising Class A common stock with super vot-ing rights which will carry one vote per share, and Class B common stock, which will carry 10 votes per share. Draftking’s CEO, Jason Robins, holds Class A and Class B common stock and as such holds approximately 90% of voting power.
At Nikola, which only has one class of shares, the impact of Milton’s 25% shareholdings in the company is an unknown.
