Weekly Brief: Start-Up or Up-Start? Nikola a Warning to EV Over-Reachers

The US Department of Justice has charged Nikola founder and former CEO and chairman Trevor Milton with two counts of securities fraud and one count of wire fraud.
The charges allege that Milton used an elaborate web of lies and deceit to inflate the stock price of his company and to “defraud and mislead investors” before it went public in 2020. Authorities took Milton into custody last Thursday in New York City, where he declared himself not guilty and was released on a $100M bond.
Milton’s legal team insists that time will prove him innocent but, based on the DoJ’s 49-page grand jury indictment, things don’t look good. Federal prosecutors say that Nikola was little more than a smoke screen when it first came out of stealth mode back in 2016. At a splashy launch event for the Nikola One in December of that year, Milton swooned that his hydrogen semi-truck was a fully functioning prototype, ready for immediate purchase and zero-emissions performance. In fact, the semi on display was allegedly built by combining random parts of other vehicles, towed into place on stage and plugged into a hidden wall socket to present the illusion of a functioning truck.
The illusion worked. Investors hailed the start-up as the next Tesla and it was valued at north of $31Bn by the time it went public in 2020 by way of a back-door blank cheque special purpose acquisition company (SPAC). Milton made billions, even though his company had allegedly abandoned the Nikola One way back in 2016 and never produced anything that actually functioned thereafter. Federal prosecutors further allege that in a promotional video, a Nikola semi truck was towed to the top of a hill and then released, to make it look like it could power itself. To keep its doors from flying open, the folks on set used duct tape. Milton swore that the Nikola Badger (pictured) pickup truck was “a clean sheet,” meaning that it had been built from the ground up without borrowing parts from other vehicles. In fact, it was allegedly just a Ford-150 with some window dressing.
Some of these allegations aren’t new. Back in September 2020, two days after Nikola secured a lucrative partnership with General Motors to build a joint pickup truck, short-selling firm Hindenburg Research published a damning report titled: Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America. GM pulled out of the partnership shortly thereafter and Milton stepped down as its CEO by the end of the month, even though he contested Hindenburg’s report as unfair and self-serving, given that it was a short-selling firm that had picked Nikola to short sell. Milton berated the firm and the author of the report on social media.
The new federal charges suggest that Hindenburg was onto something. Nikola responded last week by trying to separate itself from the antics of its former CEO and founder. “Trevor Milton resigned from Nikola on September 20, 2020 and has not been involved in the company’s operations or communications since that time. Today’s government actions are against Mr. Milton individually, and not against the company.” Nonetheless, its stock value plummeted 15% last Thursday, capping off a 21% drop year to date and a 76% drop from its 52-week high.
It remains to be seen how this all plays out in court. Milton could go to jail, following the likes of Uber’s self-driving car cyber thief Anthony Levandowski who was sentenced to 18 months in prison in 2020. Or perhaps Milton will find a way to settle out of court and retreat to his 2,700-acre ranch in Utah with his billions of dollars and live happily ever after, as fraudulent white-collar criminals too often get to do.
What’s for certain is that Tesla’s meteoric rise is proving increasingly difficult for other start-ups to follow. Milton tried to copy everything from Tesla, even its name, which was inspired by the first name of famed inventor and electrical engineer Nikola Tesla, rather than his last. Milton also was clearly inspired by Elon Musk’s habit of hyperbole. The difference is that Musk’s company actually has innovative technology backed up with factory production and working products (even if its timelines are still famously behind schedule).
Also different is the fact that Musk founded Tesla in 2003, before the major automotive players were devoted to the EV revolution. Now every automaker is jumping on board and most are committed to going fully electric in the coming decade. That makes it much more difficult for start-ups like Nikola to compete and more desperate to inflate interest and investment. Last week EV start-up Lordstown Motors, which also went public through a blank-check SPAC in 2020 in order to raise funds, sold $400M in stock to a hedge fund in hopes of staying afloat for a few more months. The future may still be bright for EVs and hydrogen fuel cell technology but it’s becoming increasingly bleak for start-ups that haven’t already found their footing.