It’s been a bumpy road for the electric vehicle startups that rushed to go public over the past two years by merging with a publicly traded shell company.

Now, the SEC’s broadest attempt to crackdown on these so-called reverse mergers could put a few speed bumps on the road to becoming — and maintaining — a SPAC.

The U.S. Securities and Exchange Commission will conclude Tuesday a 60-day public comment period on a number of proposed guidelines for SPACs, specifically around disclosures, marketing practices and third-party oversight. If approved, the barrier of entry to becoming a SPAC will rise, putting it on par with the regulatory burden placed on companies that pursue the more traditional IPO path.

The rules will “help ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings,” SEC Chairman Gary Gensler said when the proposal was first released back in March. The rules, if approved, will also strengthen protections for current investors, as well as prevent SPACs from using “overly optimistic language or over-promise future results” to appeal to potential investors.

“Ultimately, I think it’s important to consider the economic drivers of SPACs,” Gensler said in March. “Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO.”

The details

The most significant change to the proposed guidelines requires aligning the financial statements required for SPACs with those of traditional IPOs, a major step toward creating more transparency. This includes more disclosure across several areas.

The guidelines also call for gatekeepers such as auditors, lawyers, and underwriters to be held responsible for their work, including assuming liability for the registration statements SPACs must file ahead of a target IPO. Gensler said the changes “provide an essential function to police fraud and ensure the accuracy of disclosure to investors.”

While the proposal winds through the approval process, some players in market have pressed the pause button.

For instance, Goldman Sachs halted its dealmaking in May as it waits to see how the new regulations will affect dealmaking, especially if the SEC revokes the so-called safe harbor protection that until now has allowed SPACs to make bullish projections. Credit Suisse and Citigroup have voiced alarm, too.

“I could say I think I’m gonna make a bajillion dollars in 2025, but here are all the reasons why I might not,” said Ramey Layne, a capital markets and M&A attorney at Vinson and Elkins. “If you say that there’s a safe harbor, then you can’t be sued for that if it proves to be wrong.”

The SEC’s proposed regulations are “a very big step in the right direction,” said Stanford Law School professor Michael Klausner, especially if SPACs are required to “disclose the extent to which their shareholders’ equity is diluted at the time of the merger.”

The SEC expects to finalize new guidelines during the second half of 2022. Meanwhile, of the roughly 600 SPACs currently searching for a company to acquire, some deals have ground to a halt or been scrapped, according to SPAC Research.

The catalyst

Allowing pre-revenue startups to take a shortcut to an IPO before selling a single vehicle has led to trouble on numerous fronts.

Regulations today are so lax that commercial EV maker Electric Last Mile Solutions has gone without an auditor for the last three and a half months. The manufacturer, which went public in June 2021 through a $1.4 billion merger with Forum Merger III, said Friday in an SEC filing that it is in danger of running out of cash in June, one month sooner than projected, if it doesn’t find funding.

Electric Last Mile Solutions is also at risk of being delisted if it doesn’t file its delayed 2021 annual report and Q1 2022 financial report. The company blamed the delay on an acrimonious split with its accounting firm, BDO.

The public spat over who had helped the EV maker’s leadership architect a scheme to buy discounted shares pre-merger – a move that led to the resignations of both the company’s CEO and chairman in February – sparked an SEC investigation into the company in March.

That news sent shares tumbling below $1 and compelled the company to lay off nearly a quarter of its workforce to cut costs, and pull its guidance for the remainder of 2022. Now the SPAC is at risk of being delisted from the Nasdaq if it doesn’t submit a plan by Tuesday to comply with regulations.

Other examples of this laissez faire approach abound in the SPAC world. Canoo, Faraday Future, Lordstown Motors and Nikola are just a few of the SPACs that have run into trouble.

Faraday Future also faced a Nasdaq delisting, but managed to file its 2021 annual report and 2022 first quarter financial results this month.

While the earnings reports staved off the delisting, they also showed a company burning through cash with little to no prospects of revenue in the near term.

The company reported an operating loss of $149 million for the first quarter of 2022, compared with $19 million for the same period a year ago. The widening loss is due to “a significant increase in headcount and employee related expenses, and an increase in professional services primarily related to the special committee investigation,” the company said in a statement. Net loss increased to $153 million for the three months ended March 31, 2022, compared with a $76 million loss for the first quarter of 2021.

Faraday Future also continues to have trouble getting its fantastical, 1,050-horsepower FF 91 into production. The flashy sedan can travel from 0 to 60 mph in 2.39 seconds and travel more than 300 miles on a single battery charge, the automaker said.

The company recorded 401 pre-orders for the FF 91 as of March 31 and plans to launch the car during the third quarter of 2022, CEO Carsten Breitfeld said in a call with investors on Monday. The $1,500 pre-orders are fully-refundable non-binding deposits, and pricing will be announced closer to launch.

“Keep in mind that the FF 91 is not a high-volume car,” Breitfeld said, adding that the automaker plans to ramp up eventually to 6,000 to 8,000 units a year.

About 80% of the equipment Faraday needs to build the FF 91 is at its factory in Hanford, California, and the rest is on track to be delivered. The automaker said it has funding to cover its current production run but will need more money to produce its second model, an FF 81 sedan for the mass market, and smart last-mile delivery vehicle called the FF 71.

Faraday also said it signed a lease on its first store, in Beverly Hills, California, and secured a dealer license to sell its cars nationwide online.