Lesson A6.4 · 4 of 5 · Special situations
What is a SPAC and how does it work: dilution and the Nikola case
A SPAC is a company with no business that lists to raise cash, holds it in a trust account and usually has two years to merge with a private company. The costs of the structure fall on the shareholders who stay: in the study by Klausner, Ohlrogge and Ruan, median net cash at the merger was $5.70 per $10 share.
Terms in this lesson
- IPO
- The moment a company sells its shares on the stock exchange for the first time.
- Short selling
- You sell borrowed shares, hoping to buy them back cheaper.
- Revenue
- All the money the company bills from sales, before any cost.
What is a SPAC: the trust account, the deadline and redemption
The first lesson of this chapter covers a conventional IPO. A SPAC (special purpose acquisition company) is a back door to the stock market: an empty shell lists first, then merges with a private company, which thereby becomes listed (the step is called a de-SPAC).
Definition
How a SPAC works, according to the SEC
A company with no business, listed at $10 a unit, with the money set aside until the merger.
The SEC’s investor bulletin (21 August 2024) describes the typical structure. Sponsors, the people who set up the SPAC, generally buy shares on better terms than IPO investors, and their compensation, along with shares issued at the merger, can materially dilute public shareholders.
- IPO at $10 a unitA unit usually holds a share plus warrants (rights to buy shares later at a fixed price).
- Trust accountThe IPO cash sits in a trust or escrow account until the merger or liquidation.
- DeadlineUsually two years, sometimes up to three, to find a target and complete the deal.
- Vote and redemptionBefore the merger, shareholders can usually ask for their money back from the trust.
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Create a free accountDilution in a SPAC: “A Sober Look at SPACs”
Michael Klausner, Michael Ohlrogge and Emily Ruan examined all 47 SPACs that merged between January 2019 and June 2020 (Yale Journal on Regulation, 2022). The sponsor typically takes a “promote” of 20% of the post-IPO shares for a nominal price. Redemption rates averaged 58%, with a median of 73%.
Net cash per share for SPACs that merged between January 2019 and June 2020, according to Klausner, Ohlrogge and Ruan: $10 raised at the IPO, against a median of $5.70 and a mean of $4.10 at the merger.
The authors conclude that the costs of the structure are borne not by the companies taken public but by SPAC shareholders who hold at the time of the merger. Those investors suffered steep post-merger losses, while sponsors did very well.
Nikola: from the VectoIQ merger to the Hindenburg report
| Date | What happened |
|---|---|
| 3 June 2020 | Nikola completes its merger with the SPAC VectoIQ, raising more than $700m. The company said it expected revenue from 2021, with its Nikola Tre electric lorry. |
| 4 June 2020 | The shares start trading on Nasdaq under the symbol NKLA. |
| 8 September 2020 | Nikola and GM announce a deal: GM takes an 11% stake and helps engineer and build the Badger pickup. |
| 10 September 2020 | Hindenburg Research, which held a short position in Nikola, publishes a report calling the company “an intricate fraud”. Nikola rejects the report. |
| 20 September 2020 | Founder Trevor Milton resigns. |
Based on the Nikola and VectoIQ press release (SEC EDGAR) and CBS News / AP, 21 September 2020.
Among the examples in the Hindenburg report was a truck filmed coasting down a hill to make it look as if it were driving under its own power. The company called the report full of misleading information and salacious accusations against its founder. Hindenburg stood to profit if the shares fell, and said so openly.
Nikola: the SEC settlement, Milton’s conviction, the pardon and bankruptcy
SEC and Department of Justice
What the authorities and the court established
Nikola paid $125m to settle SEC charges, and a jury convicted Trevor Milton of fraud.
On 29 July 2021 the SEC brought civil charges against Milton for misleading investors about Nikola’s technology, products, in-house production capabilities and commercial achievements. On 21 December 2021 Nikola agreed to pay $125m, without admitting or denying the SEC’s findings. On 14 October 2022 a Manhattan jury found Milton guilty of one count of securities fraud and two counts of wire fraud, and acquitted him of a further securities fraud count. On 18 December 2023 he was sentenced to four years in prison and a $1m fine. According to prosecutors, Milton claimed the Nikola One prototype was fully functioning when it was not, and that the company produced hydrogen when it did not; in the January 2018 video, the truck had been towed up a hill and allowed to roll down.
On 19 February 2025, Nikola filed for Chapter 11 protection in the US Bankruptcy Court for the District of Delaware, with about $47m in cash, and sought approval to auction off the business. On 27 March 2025 Milton announced that President Donald Trump had pardoned him; the White House confirmed it the next day. Milton had not been jailed while his appeal was pending.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: SEC / Investor.gov, “What You Need to Know About SPACs - Updated Investor Bulletin”, 21 August 2024; Klausner, Ohlrogge and Ruan, “A Sober Look at SPACs”, Yale Journal on Regulation 39:228 (2022); Nikola, Form 8-K of June 2020 (Item 2.01: business combination completed on 3 June 2020) and the press release on completing the merger (Exhibit 99.1, SEC EDGAR); CBS News / AP, 21 September 2020; SEC press releases 2021-141 (29 July 2021) and 2021-267 (21 December 2021); Reuters, 14 October 2022 (Yahoo Finance); US Attorney’s Office SDNY, press release of 18 December 2023; AP, 19 February 2025 (NY1) and 29 March 2025 (Arab News); our own calculations.