I want to be clear: I am not an investor in Elio Motors (OTCQX: ELIO). I did not participate in any manner with their offering under the new and improved Regulation A (also called Reg A+), and I did not promote it. I will gain nothing if Elio is successful. However, I desperately want them to be successful because if Elio Motors fails, I, and other professionals like me, also stand to fail.
In June of 2015, the new rules of the JOBS Act finally made Regulation A legal. This was a long time in coming and much awaited considering the JOBS Act was passed way back in 2012. Elio Motors did not hesitate in taking advantage of the new rules and filed their own approximately $25 million Regulation A offering on August 28, 2015 with a qualification date of November 20, 2015. Elio immediately reached out to its many disciples to solicit investments. Who better to invest in a startup than the loyal (potential) customer?
Elio Motors was special. They were designing an inexpensive “motorcycle car” that was “high quality, reliable, safe, eco-friendly and affordable.” This was very exciting to anyone who wanted to buy a Tesla, but couldn’t afford one. The public was sold. Elio told their loyal followers that they “[hoped] to make a game-changing impact beyond sales; creating thousands of jobs, reducing dependence on foreign oil, reducing emissions, and favorably affecting the trade deficit by reducing foreign oil purchases, exporting vehicles, and providing a significant return for investors.”
Sounds romantic.
Of the money raised, Elio predicted they would need to spend approximately $7,451,000 on the development of a prototype. By reading the offering circular, it seemed that Elio Motors thought of everything – right down to the colors of the cars: Rocket Silver, Sour Apple, Creamsicle, Red Hot, True Blue, Licorice and Marshmallow.
After approval, Elio offered their newly qualified stock at $12.00 per share. An investor could participate for a mere $600. From the sales of the shares, Elio netted approximately $16,000,000. This amount would make it seem that Elio Motors, after toiling since 2009 on an eco-friendly, affordable vehicle, would be able to finally build a working prototype.
Unfortunately, the working prototype does not really “work”….yet…
Elio was honest: they told the investors exactly what was going on in both risk factors and financials. However, they were also unreasonably optimistic and financially burdened from the beginning.
60 to Zero
Here are some of the reasons the investors of Elio Motors will most likely never see their investment dollars again:
- Elio Motors started in 2009. Although Elio did not conduct their offering until 2015, they have been in existence since 2009. I will admit, I know nothing about the science or governmental regulation surrounding the building of a car. I do imagine it takes a long time. However, by their 6th year anniversary, the company did not have (and still doesn’t have) a working prototype.
- Elio Motors has a ton of debt. Before they even hit the market with the Regulation A offering, Elio motors was holding debt upwards of $70 million. Of this, $17 million was customer deposits, – meaning they had to build a car and then sell it to the customer. They now have in excess of $123 million in debt.
- The officers were getting paid (very) well. This one is tough. It’s important that the best and brightest are in the positions that determine shareholder wealth and that they are compensated appropriately to keep them adequately motivated. However, in the case of Elio Motors, a company that has not generated ANY revenues, it is hard to swallow $250,000 salaries for officers while they also hold 87.1% of the outstanding stock. Paul Elio, CEO and Chairman, holds 65.8% of the outstanding stock, meaning he sets his own salary.
- The timeline and financial needs were overly optimistic. Elio Motors predicted a 15-month timeline from Regulation A offering to market. This means that Elio should have started production this month. Now, it is reported that they need a whopping $376 million to even start production and production will start no sooner than 2018. Production has no chance of happening if additional capital isn’t available.
- Elio is out of money. Elio needs money to move forward, but they also don’t have any money. Of all the capital the company has received over the last several years, they are down to approximately $120,000.
- The shares have already taken a massive hit. Stuart Lichter, an investor and director, invested additional capital of approximately $514,000 in Elio Motors. However, this was at a price point of $5.98 per share – a price that is half of what the shareholders in the Regulation A paid. As of the writing of this article, the shares are trading at $6.35 per share.
Why There is Sadness
Regulation A is such an amazing opportunity for entrepreneurs, startups, and, especially, investors. It has been one of the great misfortunes of our legal system that the best deals were only available to accredited investors.
Now, with Regulation A allowing anyone to invest, average Joe investor has an opportunity to get in on the “next big thing” at the ground floor. Elio Motors was supposed to be that “next big thing.”
Failure of Elio Motors is not an option as the domino effect will be overwhelming:
- There will be more stringent and careful eyes at the Securities Exchange Commission on future filings. This means it will become more expensive and onerous for the small start-up or entrepreneur to even get to market.
- Fewer attorneys and accountants will want to take on the responsibility and liability of doing Regulation A offerings without the proper compensation. This will also drive up the cost of Regulation A offerings.
- Investor confidence will be destroyed. Elio Motors and their offering had a lot of press; they had more press and publicity than any other Regulation A offering. If the press for their filing success was under a magnifying glass, the press for their failure will be under the Hubble Telescope. Any investor, whether experienced or not, is going to be adversely affected by this news.
- The Elio Motors shareholders will lose their investment. This is the worst part of it all. The shareholders took a real chance and believed in the company. There is risk associated with every investment and there was certainly risk with Elio Motors – it was written all over their prospectus. However, it will be particularly sad to see these smaller investors who believed so much in the company and concept to lose their investment dollars.
In the end, all we can do is shut our eyes and hope that Elio turns out like Tesla.
Jillian Sidoti, Esq., CCIM is one of the country’s leading experts on Regulation A+. Since 2008, Jillian has submitted multiple Regulation A Offering Circulars to the Securities Exchange Commission for approval making her one of the few attorneys familiar with the law prior to the changes under the JOBS Act. Since the JOBS Act, Jillian has assisted multiple companies and entrepreneurs realize their fundraising goals through Crowdfunding, 506(c) and Regulation A. She is a practiced speaker whose engagements are well attended and often come to produce sound bites and additional discourse. In Crowdfunding Myth, Jillian enumerates on the falsehoods that people tend to believe about crowdfunding and points prospective business owners in the right direction. For several years, Jillian taught Finance and Accounting for the BS and MBA programs at the University of Redlands, drawing on her experience as Financial Analyst, Controller and CFO for many companies, ranging from manufacturing to real estate development. Jillian may be contacted at jillian@crowdfundinglawyers.net or 323-799-1342
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