Today's Theranos would have gone public via a SPAC

3 minute read

Theranos founder Elizabeth Holmes arrives at the Robert F. Peckham Federal Building to attend a federal court hearing in San Jose, California, U.S. May 4, 2021. REUTERS/Kate Munsch

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WASHINGTON, Sept 8 (Reuters Breakingviews) - At least the damage at Theranos was confined to professional investors. Elizabeth Holmes’ blood-testing outfit touted novel technology and big future sales before its collapse. Holmes, whose trial starts on Wednesday, blurred the lines between marketing and fraud, and Theranos' multibillion-dollar private-market valuation dwindled to nothing. Fast forward and Trevor Milton, founder of electric-truck firm Nikola (NKLA.O), is facing similar charges. Nikola, though, has publicly traded shares.

Nikola came by its listing through a mid-2020 merger with a special-purpose acquisition company. Then in July 2021, the U.S. attorney’s office in Manhattan indicted Milton for misleading investors. He pitched Nikola One, the firm's debut truck, as a fully-functioning prototype. In reality, the product was missing significant parts and had to be towed onto the stage before its unveiling, according to the indictment.

Misrepresentations about Nikola's financial prospects also spurred investor interest after it went public, prosecutors say. Milton talked of “billions and billions” of sales contracts that were binding when the company actually had 14,000 reservations, most of which could be canceled. He has pleaded not guilty.

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In the recent craze for blank-check companies in the United States, dozens of SPACs seeking merger targets within a set period, typically two years, have gone along with ambitious forecasts to get deals done. That has turned early-stage startups into publicly traded companies whose shares are available to everyone.

Some will eventually deliver the financial goods. But Theranos is a cautionary tale. The former Silicon Valley darling was valued at $10 billion in 2015 on the promise of a machine that Holmes said could perform more than 240 clinical tests using a finger-prick of blood. Now she is accused of misleading investors. She has pleaded not guilty.

Holmes indicated Theranos was expected to generate $1 billion in revenue in 2015 when she knew the accurate figure was a few hundred thousand dollars, according to prosecutors. Whether optimistic projections are made in good faith or not, this is the kind of risk venture capitalists take every day. It's a far less common situation for public shareholders.

That's the change between then and now. If a SPAC could get comfortable buying Nikola, merging with Theranos would have been a no-brainer. And the losses would have hit mom-and-pop investors, not just experts. It's the kind of bleeding U.S. securities regulators, already wary of blank-check vehicles, want to avoid.

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- Opening arguments for the criminal trial of Elizabeth Holmes, founder of defunct blood-testing startup Theranos, are scheduled for Sept. 8. She has pleaded not guilty to defrauding investors and patients by falsely claiming that Theranos had invented technology to conduct a wide range of medical tests based on a single drop of blood.

- The U.S. Department of Justice on July 29 indicted Trevor Milton, founder of electric-truck startup Nikola, on charges of making false and misleading statements to investors. Milton denies the charges. Nikola became a public company in June 2020 following a merger with a special-purpose acquisition company. Milton resigned as executive chair in September 2020 after hedge fund Hindenburg Research accused him of making "material false statements" about Nikola’s business.

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Editing by Richard Beales and Karen Kwok

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