Faraday Future was investigated by the Department of Labor in 2020, though the electric vehicle startup says the matter was “resolved,” according to a previously unreported passage in a recent regulatory filing.
The startup didn’t say what the investigation was about or how much it paid to resolve the legal matter. Faraday Future’s former chief lawyer has claimed in a lawsuit that the company was previously inspected by the Department of Homeland Security’s United States Citizenship and Immigration Services division in 2018, though the startup denied this in court filings. A spokesperson for Faraday Future declined to comment on the investigation.
The regulatory filing, known as the S-4 “registration statement,” was published as part of Faraday Future’s merger with a special purpose acquisition company (SPAC) called Property Solutions Acquisition Corp. When that merger is done, Faraday Future will be a publicly traded company and will have around $1 billion in fresh cash — capping a remarkable turnaround from the brink of bankruptcy and giving it the money it needs to finally try to put its high-performance, ultra-luxury electric SUV into production.
One of the trade-offs of going public is that you have to disclose far more information than you do as a private company. So this dense document not only offers the best X-ray of Faraday Future’s business to date, but it also sheds light on a number of other previously dark corners of the history of the troubled startup and its founder, Chinese tech tycoon Jia Yueting. Here are a few other things that stood out:
Jia Yueting is a risk
Jia has spent the last few years living in California after self-exiling himself from China, where he was named to a debtor blacklist following the collapse of his tech conglomerate LeEco. His habit of borrowing too much money has left a trail of “debt bombs” that continues to haunt him to this day. In fact, the weight of that debt is what drove him to file for personal bankruptcy in 2019, and now those companies he owed money to have small equity stakes in Faraday Future.
While Jia has been replaced as CEO, all of this baggage presents a risk to the company going forward — literally. Public companies have to list out all of the imaginable problems that investors should know about, and Jia has his own dedicated “risk factor.”
As that section reads, Jia’s “image will be closely associated with [Faraday Future’s] brand,” according to the filing, and the “media’s focus on negative coverage could materially and adversely affect FF’s valuation and investors’ confidence. Such negative publicity could also solicit inquiries from securities regulatory bodies in the relevant jurisdictions where FF does business.”
Jia is now Faraday Future’s “Chief Product and User Ecosystem Officer,” and he remains on the startup’s executive management committee. And repercussions from his actions continue to pop up, too, as just last week he was banned for life from the securities market in China for “fraud” committed at LeEco. Faraday Future also says in the S-4 that its subsidiaries in China — many of them LeEco-related — are involved in around 90 legal disputes.
Faraday Future had just $1 million in the bank at the end of 2020 and suffered steep losses
Faraday Future has spent the last few years treading financial waters, and this new filing shows how close it was to going under. Previously, the best idea of how much cash the startup had on hand came from Jia’s bankruptcy filings, which showed that Faraday Future had around $6 million in the bank by July 2019. Now, we can see that Faraday Future finished 2019 with just $2.2 million in cash and 2020 with just $1.1 million in cash.
Those are measly figures when compared to the annual losses Faraday Future has recently posted: $142 million in 2019 and $147 million in 2020. In its near seven-year history, Faraday Future has spent some $2 billion total without generating any revenue.
Working with a restructuring firm in 2019 likely saved Faraday Future
How did this startup survive for years with only that much cash in the bank and around $800 million in current liabilities? It took on more debt.
Faraday Future is very possibly only still around because of a deal it struck in April 2019 with Birch Lake Associates, a Chicago-based merchant bank that advises restructurings and is run by what one expert described to The Verge at the time as a “bankruptcy legend.”
Throughout the S-4, Birch Lake’s fingerprints are all over the last two years of Faraday Future. Birch Lake arranged to have tens of millions of dollars loaned to Faraday Future in 2019, shortly after the startup broke up with its biggest outside investor, Chinese conglomerate Evergrande. Birch Lake has also helped consolidate and refinance some of Faraday Future’s old debt that was either coming due or in default.
One of the key things Birch Lake was involved in, though, was creating a so-called “vendor trust.” At the time that Birch Lake started working with Faraday Future, the startup owed more than $100 million to the suppliers of components for its electric SUV. But many of those suppliers weren’t getting paid. Since Faraday Future didn’t have much money, Birch Lake helped solve this by setting up a trust that let suppliers essentially exchange their debt claims for what became small ownership stakes in the startup, which could pay out if and when Faraday Future went public or got bought — a deal that probably looks much better now than when those companies took it.
A 2019 deal with a Chinese gaming company never went anywhere
After it announced the deal with Birch Lake, Faraday Future also announced a potential investment from Chinese gaming company The9. The two companies were supposed to start up a joint venture in China that would see The9 contribute up to $600 million and Faraday Future develop an electric minivan.
But neither side ever really spoke about that effort again following the announcement, and based on The9’s own financial filings, it’s been clear since last August that the deal was dead. Faraday Future basically confirms this in its S-4, saying the deal is “dormant.” The9 did make an initial deposit of $5 million when the companies agreed to the deal in 2019 as a commitment, but that’s since been converted to stock.
(Another partnership with commercial powertrain company US Hybrid, announced in 2020, is mentioned nowhere in the S-4.)
Faraday Future and LeEco’s separate electric car efforts weren’t so separate
This likely won’t surprise anyone who has followed Faraday Future or Jia closely, but at one point, both of his companies were working on electric cars, seemingly at odds. As The Verge, Jalopnik, and BuzzFeed have reported, the two projects actually had a lot of overlap, despite the companies maintaining at the time that they were distinct.
But there’s a stark admission in the S-4 that finally drops the veil: LeSee, which was the brand for LeEco’s EV project, was treated as a subsidiary of Faraday Future and was considered the startup’s “primary Chinese operating entity.”
Neither were their finances
Another thing that has been previously reported, but now there are concrete details in the filing that partially describe some of the many loans Jia Yueting used to move money throughout his empire. Leview Mobile, a LeEco-related company, loaned $67 million to Faraday Future in 2018. LeSee, meanwhile, borrowed nearly $30 million from a Chinese entity controlled by Jia that also was the beneficial owner of Faraday Future’s Hong Kong subsidiary. In 2017, Faraday Future borrowed nearly $9 million from a small bank that Jia owned in China.
Faraday Future also borrowed multiple times from unnamed employees starting in 2017 and running through 2020, ranging from as low as $700,000 and as high as multiple millions. In one case, Faraday Future says it borrowed $16 million from a company owned by an employee.
Jia’s bankruptcy filings also shed light on some of these loans in 2020, including the $16 million one, which was actually originally funded by the company’s “global partners” committee but was first passed through a Delaware LLC whose president is Faraday Future’s head of investor relations.