SPAC due diligence called out in $8M SEC enforcement

The SEC alleged in a press release Tuesday the SPAC, Stable Road Acquisition Company, its sponsor SRC-NI, and Stable Road CEO Brian Kabot failed to adequately vet Momentus’ claims that it developed commercially viable technology that could propel a satellite into a custom orbit. The SEC also fined Kabot $40,000 personally.

In addition, the SEC filed a separate lawsuit in U.S. District Court for the District of Columbia against former Momentus CEO Mikhail Kokorich, a Russian citizen living in Switzerland who founded the company in 2017. Kokorich resigned from the company in January. The SEC alleged Kokorich’s involvement in Momentus presented national security concerns, and that Kokorich misrepresented the extent to which these concerns “undermined Momentus’ ability to secure required governmental licenses essential to its operations.”

“The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”

SEC Chair Gary Gensler

Stable Road’s “due diligence of Momentus was conducted in a compressed timeframe and unreasonably failed both to probe the basis of Momentus’ claims that its technology had been ‘successfully tested’ in space and to follow up on red flags concerning national security and foreign ownership risks,” the SEC said in its order. The SPAC’s “public filings, including registration statements signed by Kabot, incorporated Momentus and Kokorich’s false and misleading claims and caused investors to be misled about material aspects of Momentus’ business.”

The details: Momentus’ claim to have developed commercially viable technology to launch satellites into custom orbit were unproven, and the company’s only test of the technology, in 2019, “did not meet any of the public or internal success criteria,” according to the SEC. The satellite launched in the test is still in space but not functional, the SEC said.

Stable Road hired a space technology consulting firm to conduct a rapid technical assessment of Momentus’ technology, but the firm did not examine the results of the only test Momentus undertook, the SEC said. Instead, it relied on Kokorich’s assurances that the early-stage test results were not relevant to their current work “due to their development of the technology in the intervening 16 months.”

In the October 2020 press conference and accompanying presentation announcing Stable Road would be taking Momentus public via a SPAC, the 2019 test results were described as “successful” and the satellite was deemed operational. The SEC said both claims were demonstratively false.

Compliance takeaways: Momentus and Kokorich never shared with Stable Road and Kabot the tests of its propulsion technology were unsuccessful, the SEC said. Nevertheless, Stable Road “acted unreasonably in adopting and repeating Momentus’ claim that it had successfully tested its technology in space when it had not conducted any specific due diligence to evaluate and verify the accuracy of that material assertion.”

“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,” said SEC Chair Gary Gensler in a statement. “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. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”

SPACs exploded in popularity last year, with 248 formed raising $83 billion in capital to launch new public companies. Compare that to 2019, when there were only 59 SPACs raising $13 billion, according to SPAC Analytics. Last year was the biggest for SPACs since at least 2003 by a lot—but 2021 is already bigger.

This year, 369 SPACs have raised $112 billion in capital, according to SPAC Analytics. The popularity of the investment vehicle continued despite a series of statements from the SEC in April that reinforced key financial reporting and auditing considerations for private companies entering public markets through a merger with a SPAC.

For all their recent popularity, SPACs come with a unique set of risks that can tie compliance officers in knots, from conflicts of interest that are baked into fund documents to pronounced risks of insider trading.

The SEC’s order finds Momentus “violated scienter-based antifraud provisions of the federal securities laws and caused certain of Stable Road’s violations. It also finds that Stable Road violated negligence-based antifraud provisions of the federal securities laws as well as certain reporting and proxy solicitation provisions,” the agency said. Kabot allegedly violated federal securities laws related to proxy solicitations as well.

The SPAC merger between Stable Road and Momentus is still scheduled to take place in August. As part of the settlement, Stable Road and Momentus have “agreed to provide PIPE (private investment in public equity) investors with the right to terminate their subscription agreements prior to the shareholder vote to approve the merger,” the SEC said.

Momentus’ response: “We’re pleased to be closing this chapter and moving forward,” said Momentus interim CEO Dawn Harms, through a spokesperson. “We remain committed to building a partnership with the U.S. government, demonstrating value to our stockholders and customers, and looking ahead to a bright future as a public company.”

Momentus announced Wednesday that it hired a new CEO, John Rood, the former U.S. Under Secretary of Defense for Policy. Rood, who is also a former senior vice president at Lockheed Martin, is slated to assume control Aug. 1. Harms will return to her prior role as Momentus’ chief revenue officer.

Neither Stable Road nor Kabot responded to a request for comment.