By: Alexandra Evarts
What counts as fraud when promoting a company to attract investors? The answer to this question was recently addressed by a jury in the U.S. District Court of Southern New York. The jury convicted Trevor Milton, former CEO and founder of Nikola Motor company, on three separate counts of fraud. The verdict was applauded by prosecutors as a strong warning to the technology industry, specifically those seeking to go public through special purpose acquisition companies (“SPAC”), that there are serious criminal repercussions associated with intentionally misleading and deceiving investors in order to secure funding. This article explores the actions that Nikola and Trevor Milton took to become criminally and civilly liable for fraud, and whether the verdict will effectively serve as a warning to tech companies seeking to go public through SPACs.
In 2014, Trevor Milton founded Nikola Motor Company, a producer of electric vehicles powered by hydrogen. As Nikola began unveiling new electric powered vehicles, like the Nikola One, the company started to attract the attention of investors and partners. However, after the launch event for the Nikola One, where the electric truck was prominently on display, Bloomberg published an article uncovering that the Nikola founder exaggerated the capability of Nikola One at the event. The article exposed early signs of trouble at Nikola and for Milton, who claimed that the truck was drivable during the event, when people familiar with the truck’s capability said that it was inoperable and missing key components to power itself.
By 2020, Nikola went public as part of a merger with VectoIQ Acquisition Corp., a special purpose acquisition company. On the first day of trading, Nikola ended the day with a valuation of more than $28 billion. As the company was going through the SPAC process, Milton “brazenly and repeatedly made false claims about the status of Nikola’s technology” and “told lies to generate popular demand for Nikola’s stock” on social media and to the press. Unlike an IPO, where there is a mandatory quiet period in the months prior to public trading, a SPAC has no such requirement, which allows companies to speak more freely on social media and to the press throughout the process of going public. Another key differentiator of the SPAC process is that the route allows companies to market themselves based on future projections of performance rather than actual financial results.
In September 2020, just after Nikola had announced a partnership with GM, which increased the stock by 53%, a major report was published by a research firm called Hindenburg that accused Nikola of fraud. The report concluded that Nikola “vastly overstated the capabilities of its technology and vehicles”. After the report was published, The Securities and Exchange Commission (“SEC”) began investigating allegations of fraud against Nikola, and an investigation by the US Department of Justice followed. By December 2021, in what an SEC official said they hoped to be a warning to all companies seeking public markets via a special purpose acquisition company, the Securities and Exchange Commission announced that Nikola agreed to pay $125M to “settle charges that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects.” The SEC order claimed that “before Nikola produced a single commercial product, Milton embarked on a public relations campaign aimed at inflating and maintaining Nikola’s stock price.” The order described how Milton had misled investors about everything from Nikola’s technological advancements to its financial outlook.
Then, in July 2021, Milton was indicted by a grand jury for three counts of criminal fraud – two counts of securities fraud and one count of wire fraud – for lying about “nearly all aspects” of Nikola’s business. In October 2022, Milton was found guilty on a count of securities fraud and two counts of wire fraud in a U.S. District Court. As U.S. Attorney Damian Williams said in a statement, “Trevor Milton lied to investors – over and over and over again. That’s fraud plain and simple,” and “[l]et this case serve as a warning to anyone who plays it fast and loose with the truth to get investors to part with their money. It won’t end well.”
As more companies seek to go public through SPACs, one of Wall Street’s fastest areas of growth, Milton’s conviction on three criminal fraud charges, as well as the company’s $125M settlement with the SEC, should serve as a strong warning to other startup founders who overhype their businesses to attract investment. However, it is unclear if this warning will be effective. According to a recent report from The Wall Street Journal, almost half of all startups with less than $10 million in annual revenue that went public in 2021 through a SPAC are now failing or expected to fail. The report suggests that the SPAC model is partly to blame for the trend, as the model allows startups to attract investors with bullish projections designed to entice investors in spite of poor current business performance.
While the Trevor Milton conviction may temporarily caution other executives from overhyping their forecasts, it is unlikely that it will be enough to completely deter company executives from misleading investors given the absence of regulation around the SPAC process. To prevent companies from committing fraud like Trevor Milton did, the SEC must put limits on the practice of using future projections to attract investors. By holding companies to more rigorous standards in terms of what they must disclose through the SPAC process, regulatory scrutiny will deter companies from misleading investors about their current capabilities and potential for growth. Additionally, the SEC should mandate a quiet period during the SPAC process, which would prevent companies from overhyping their business capacities and projections on social media and with the press to inflate demand for their stock with retail investors. Until there is meaningful regulation prohibiting SPAC-seeking companies from overhyping their businesses to attract investors, convictions like Trevor Milton’s will only temporarily scare the tech industry and not serve as the strong warning prosecutors and the SEC were hoping for.
Student Bio: Allie Evarts is a second-year student at Suffolk University Law School. She is a staff writer for the Journal of High Technology Law. Allie worked at two technology startup companies prior to law school, and received a Bachelor of Science Degree in Environmental Science, with a concentration in Natural Resource Planning and Policy, from the University of Vermont.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
