The SEC’s Enforcement Interest in SPACs Continues as the Commission Announces Another SPAC Settlement; And Beware of Disclosure by Tweet
By Jeff Johnston, John Wander, and Tom Mitsch
Earlier this week, the Securities and Exchange Commission (“SEC”) announced a $125 million settlement of charges against Nikola Corporation (“Nikola”), a publicly-traded company created through a special purpose acquisition company (“SPAC”) transaction, for allegedly defrauding investors by misleading them about its products, technical advancements, and commercial prospects. This follows the SEC complaint filed earlier this year against Trevor R. Milton (“Milton”), the founder, former CEO and former executive chairman of Nikola, alleging violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Sections 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder and seeking disgorgement of Nikola’s ill-gotten gains as well as injunctive relief.
Nikola was founded by Milton in 2015 with the intent to manufacture and sell low emission semi-trucks that run on alternative fuels as well as building an alternative fuel station infrastructure to support those vehicles. In June 2020, Nikola merged with VectoIQ, a SPAC, in a transaction that resulted in a net contribution of approximately $594.5 million to Nikola as well as a $70 million payout to Milton made at the closing of the transaction. Following the transaction, Nikola was listed on the Nasdaq exchange.
The SEC’s Complaint alleges that “[b]efore Nikola had produced a single commercial product or had any revenues from truck or fuel sales, Milton embarked on a relentless public relations blitz” aimed at misleading retail investors and to inflate Nikola’s stock price. Specifically, the SEC claims that Milton made numerous false and misleading statements about “core aspects” of Nikola’s business, including that its first prototype could drive under its own power, that it was able to produce hydrogen fuel at a cost four times less than market rates, that it had obtained “billions and billions and billions and billions” of dollars of committed truck orders, and that it had developed a prototype electric pickup truck which used primarily Nikola’s proprietary components. In reality, the SEC claims that many of what Milton presented as accomplishments were at best years away from completion.
Milton’s claims generated significant interest in Nikola from retail investors and the SEC alleges that Milton specifically tracked the number of retail investors who were investing in Nikola. On September 10, 2020, a financial research firm that had taken a short position in Nikola published a report asserting, among other things, that Milton made material misrepresentations about Nikola’s business. Nikola’s stock price fell approximately 24 percent on news of the report and Milton soon resigned as Executive Chairman. On February 25, 2021, Nikola filed its Form 10-K for the year ended December 31, 2020 admitting that certain Milton statements highlighted in the report released by the financial research firm were “inaccurate in whole or in part, when made.” Nikola’s stock price ultimately dropped 57 percent from the day the short report was released on September 10, 2020 to February 26, 2021, the day after the 10-K was filed.
Without admitting or denying the Commission’s findings, Nikola agreed to cease and desist from future violations of the charged provisions, and to pay a $125 million penalty. Nikola also agreed to continue cooperating with the SEC’s ongoing litigation and investigation.
The SEC noted that many of the misrepresentations at issue were made through Milton’s personal Twitter and Instagram accounts, on television programs, and in podcasts. The SEC alleged that:
- Milton did not regularly consult with anyone at Nikola before publishing Nikola-related information on social media;
- Nikola did not have a process (i.e., disclosure controls), post-merger, designed to ensure that Milton’s social media posts complied with SEC rules or otherwise required additional disclosures; and
- Nikola did not promptly correct Milton’s misstatements on social media.
This settlement is markedly similar to the SEC’s September 2018 settlement with Tesla relating to tweets from Tesla chairman Elon Musk and reinforces that the SEC will continue to monitor insider social media activity for potential violations. The message is clear that public companies should have disclosure controls for the social media posts of their senior executives.
In addition, this settlement, combined with the Akazoo and Momentus settlements announced earlier this year, as well as recent SEC commentary, also demonstrates the SEC’s increasing scrutiny of SPAC transactions, and disclosures pre and post-merger about performance of legacy companies being acquired by SPACs. Indeed, earlier this month, SEC Chair Gary Gensler gave a speech before the Healthy Markets Association in which he noted he believed SPAC investors were not receiving adequate protection in comparison to investors in traditional IPOs. Gensler further expressed concern that “SPAC sponsors may be priming the market without providing robust disclosures to the public to back up their claims. Investors may be making decisions based on incomplete information or just plain old hype.” Gensler’s comments followed prior commentary from David Peavler, the regional director of the SEC’s Fort Worth regional office, that “[t]he SEC is intently focused on SPAC merger transactions, and we will continue to hold wrongdoers in this space accountable.”
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.