SPAC sponsor, merger target charged with misleading statements

Dive Brief:

The Securities and Exchange Commission has charged special purpose acquisition company (SPAC) Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus, and Momentus’s founder and former CEO Mikhail Kokorich for misleading claims about Momentus’s technology and national security risks associated with Kokorich.
The SEC said it's settling with all parties, except for Kokorich, who remains subject to SEC litigation.
The settlement terms include total penalties of more than $8 million, investor protection requirements, and the SPAC sponsor’s forfeiture of the founder’s shares it was slated to receive should the merger be approved.

Dive Insight:

The SEC says Kokorich and Momentus, an early-stage space transportation company, told investors it had successfully tested its propulsion technology in space when, in fact, the company’s only in-space test had failed to achieve its primary mission objectives or demonstrate the technology’s commercial viability.

Momentus and Kokorich also misrepresented the extent to which national security concerns involving Kokorich undermined Momentus’s ability to secure required governmental licenses essential to its operations, according to the order.

In addition, Stable Road repeated Momentus’s misleading statements in public filings and failed its due diligence obligations to investors. Although Stable Road claimed to have conducted due diligence, it never reviewed the results of Momentus’s in-space test or received sufficient documents to assess the national security risks posed by Kokorich.

CEO Kabot participated in Stable Road’s inadequate due diligence and in filing its inaccurate registration statements and proxy solicitations, the SEC said.

“This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors,” SEC Chair Gary Gensler said. “Stable Road, a SPAC, and its merger target, Momentus, both misled the investing public. The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders."

Under the SEC order, Momentus allegedly violated antifraud provisions of federal securities laws and caused violations by Stable Road. Stable Road violated negligence-based antifraud provisions of federal securities laws and reporting and proxy solicitation provisions.

Kabot violated provisions of federal securities laws related to proxy solicitations and Kabot and SRC-NI caused some of Stable Road’s violations.

Momentus, Stable Road, and Kabot agreed to pay civil penalties of $7 million, $1 million, and $40,000, respectively. Momentus and Stable Road agreed to provide private investment in public equity (PIPE) investors with the right to terminate their subscription agreements prior to the shareholder vote to approve the merger; SRC-NI agreed to forfeit 250,000 founders’ shares it would otherwise have received upon consummation of the business combination; and Momentus agreed to enhance its disclosure controls, including by creating an independent board committee and retention of an internal compliance consultant for a period of two years.

Against Kokorich, the complaint seeks permanent injunctions, penalties, disgorgement plus prejudgment interest, and an officer-and-director bar.

“Momentus’s former CEO is alleged to have engaged in fraud by misrepresenting the viability of the company’s technology and his status as a national security threat, inducing shareholders to approve a merger in which he stood to obtain shares worth upwards of $200 million,” Anita Bandy, associate director of the SEC’s Division of Enforcement, said.