Solar Sales Contracts Cancellations: The SEC Wants the Real Numbers

The Securities Exchange Commission (SEC) is investigating Sunrun, Inc. and SolarCity Corp. (the company Elon Musk purchased from his two cousins) because of cancellations rates. The solar industry is dependent upon door-to-door sales, with the result being that consumers sign up for installations in their homes. That in-home sign up, plus the credit contracts that go with the sales, and the resulting liens on the consumers’ homes mean that the Truth in Lending Act applies.  Part of thet act gives consumers in these situations three days from the time of the loan/lien closing to rescind their contract.  If all of the required disclosures and information on the transaction have not been made, the rescission period runs three years.

Sunrun has received a subpoena and its shareholders have hired a law firm to investigate possible claims on their behalf.

With solar companies, there is the credit contract for the consumer’s solar system.  When that is signed, the company can book a sale.  However, there is the rescission period and it seems that solar-panel decisions carry a great weight when it comes to buyer’s remorse.  In the solar industry, some consumers are rescinding just as the solar panels are set to be installed, which is about when the lien would go in effect and which starts the run of the three days. 

The SEC is investigating because it believes the companies are not being as transparent and forthright as they need to be in disclosing their rates of cancellations, i.e., how many buyers rescind their agreements prior to installation. The cancellation rate affects the value of the shares of the solar companies because that cancellation rate is an indication of growth potential and whether the revenue stream is subject to further fluctuations.

At SolarCity, cancellations reached 50% in 2016, just before Tesla’s acquisition.  Sunrun had a cancellation rate of 40%, a rate that caused the company to reduce its growth expectations from 80% to 40%. Sunrun’s stock price is down 60% and two smaller solar companies have filed for bankruptcy. After the announcement of the investigation, Sunrun’s stock dropped 8.8% to $4.75 per share, its lowest in 11 months.

The door-to-door sales have become problematic because of some of the tactics used.  For example, one customer decided against a Sunrun system and called to explain that she was not interested.  The company indicated that she already had a contract and could not cancel.  She did not recall signing a contract, but the company pointed out that she had checked a box on the sales rep’s iPad and that was the contract.  Known as fraud in factum, this is a ploy often used to get customers committed.  The customers believe they are simply checking a box for the sales rep to show that there was a demonstration.  The checked box is actually the signature for a contract.  The customer is entitled to set aside the agreement when there is fraud in factum.  The customer was so taken aback by what happened that they decided to forget about solar panels entirely. Kirsten Grind, “Solar Firms Probed Over Hiding Client Cancellations,” Wall Street Journal, May 4, 2017, p. A1. 

While the companies enjoy the benefit of a new technology and the environmentally helpful product, the sales are still dependent on customers trusting and committing.  Both the federal law and sales tactics have proven to be a threat to growth. SolarCity announced that it was ending door-to-door sales.

DISCUSSION STARTERS

Explain the applicable of the three-day rescission period.

Explain the correlation between cancellations and sales growth and stock price.