Securities regulators have brought one of the first major enforcement actions against a cash-rich blank check company, which may prevent a planned merger involving an upstart space transportation company from taking off.
A civil settlement has been reached with several parties involved in the planned merger of Momentus, a company that claims to have developed a unique propulsion technology, and Stable Road Acquisition, which is a special purpose acquisition company, the Securities and Exchange Commission announced on Tuesday.
Despite the fact that the propulsion system failed in space testing, investors were misled into believing it had been successful, according to regulatory authorities.
Over the past 18 months, hundreds of speculative special purpose acquisition companies, or SPACs, have raised nearly $200 billion in capital from investors, a boom that has prompted increased regulatory scrutiny. Space-related start-ups have been a popular target for these companies in the past.
However, a number of start-ups that have either merged with blank check companies or announced merger plans have disclosed that they are the subject of SEC investigations as the agency investigates potential abuses in the SPAC market.
“This case demonstrates the risks associated with SPAC transactions, as those who stand to gain significantly from a SPAC merger may conduct inadequate due diligence and mislead investors,” said Gary Gensler, chairman of the Securities and Exchange Commission.
The S.E.C. stated in the settlement order that Stable Road had not done enough to determine whether or not Momentus’s claims about its rockets were correct.
Stable Road’s failure to conduct adequate due diligence to protect shareholders is not excused by the fact that Momentus lied to Stable Road, according to Mr. Gensler’s statement.
Stock exchange regulators also claimed that the companies, which are less than a month away from holding a shareholder vote on the proposed $566 million merger, had concealed critical “national security risks” relating to Momentus’s founder and former chief executive officer, Mikhail Kokorich, from investors.
Mr. Kokorich had been identified as a security risk by the Committee on Foreign Investment in the United States, an intergovernmental agency, several years prior to the current investigation. He resigned from his position at the company in January, two months after the merger was announced, as a result of the government’s concerns. The Securities and Exchange Commission stated that his shares had been placed in a trust.
Daily Business Briefing
July 13, 2021, 4:53 p.m. ET
As part of the agreement, Momentus, Stable Road, its sponsor SRC-NI and its chief executive officer, Brian Kabot, agreed to pay a total of $8 million in penalties to the Northern Ireland government. Despite repeated attempts to reach a settlement with the Securities and Exchange Commission, regulators filed a civil complaint against him in federal court in Washington, alleging that he was “reckless” or potentially reckless in failing to share information about the government’s concerns about him with Stable Road.
Mr. Kokorich, a Russian citizen who resides in Switzerland, could not be reached for comment immediately after being contacted. Mr. Kokorich’s attorney, Thomas Gorman, stated that Mr. Kokorich “believes the firm has a bright future.”
While Mr. Gorman acknowledges that the S.E.C.’s claims are unfortunate, he believes that they will be resolved in a way that is most beneficial to him in the future.
According to Stable Road, the Securities and Exchange Commission (SEC) notified the company in January that the agency was investigating the proposed merger. Even before the S.E.C. took action, the deal between the two companies was in jeopardy; Stable Road stated in a regulatory filing that it had “experienced a number of operational and regulatory delays.”
It is one of the criticisms of the SPAC market that the owners of blank check companies do not conduct adequate due diligence when selecting merger partners. This is especially true given the large number of cash-rich companies chasing after start-ups to acquire.
A SPAC that raises money from investors through an initial public offering (IPO) will typically return those funds to investors if the SPAC is unable to find a company to acquire within two years of the IPO. In November 2019, Stable Road completed an initial public offering (I.P.O.) that raised approximately $172 million.
Stable Road, Momentus, and Mr. Kabot did not admit or deny the allegations made against them in their settlement with the S.E.C. In exchange for their cooperation, the parties agreed to allow investors in a private placement that was organised to help pay for the transaction to redeem their funds.
The Securities and Exchange Commission stated that the settlement and civil suit against Mr. Kokorich would provide shareholders of Stable Road with sufficient information to determine whether or not to approve the transaction.
In January, Stable Road traded as high as $25 per share, but it has recently traded for less than half of that price.