Probes, executive upheaval continue to tank SPAC-backed EV start-ups

Electric Last Mile Solutions CEO James Taylor wanted to separate his electric vehicle company by staying out of controversies that had engulfed many of his competitors.

“We have no lawsuits; no management issues, that we’re aware of; we’re delivering; we’re keeping our nose clean,” the former General Motors executive told CNBC in early November, calling the start-up’s approach “conservative” and “anti-climactic.”

Taylor was successful in doing so until last week, when he and Chairman Jason Luo, both cofounders of the company, resigned from their positions late Tuesday following an internal probe into some of their share purchases.

The resignations led to several analyst downgrades, causing ELMS shares to plummet by 53% last week, including a more than 50% drop on Wednesday. The stock is down another 17% so far this week to less than $2 a share.

ELMS’ problems are the latest for EV start-ups that went public though special purpose acquisition companies, or SPACs over the last year or two. Troubles at other companies have similarly led to executive outings as well as investigations by the Department of Justice and Securities and Exchange Commission.

“We’re in a place where the SEC and others have become deeply skeptical about SPACs,” said Priya Huskins, partner at Woodruff Sawyer, a consulting firm and a leading insurance broker in the SPAC market. “It is very unhelpful to SPAC world to have even a whiff of scandal, and self-dealing scandals are amongst the worst.”

After an unprecedented year of SPAC-backed IPOs, the market is getting crushed in the new year as speculative stocks with little-to-no earnings fall further out of favor in the face of rising interest rates.

The proprietary CNBC SPAC Post Deal Index, which is comprised of SPACs that have completed their mergers and taken their target companies public, tumbled 23% in January — even more abysmal than the tech-heavy Nasdaq’s 9% loss, its worst month since March 2020.

SPACs are publicly traded companies that don’t have any real assets other than cash. They are formed as investment vehicles with the sole purpose of raising funds and then finding and merging with a privately held company.

It’s a faster way to take a company public than a traditional IPO but many have run into both financial and legal trouble following a crackdown last year by the SEC, led by Chairman Gary Gensler.

Gensler “is completely focused on disclosures and transparency to retail investors in a post de-SPAC M&A environment,” securities attorney Perrie M. Weiner, a partner at Baker McKenzie in Los Angeles, said in an email to CNBC.

The SEC declined to comment on whether it’s opened an investigation into ELMS. The company has not disclosed any investigation.

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