(Bloomberg) — A blank-check company’s acquisition of space-cargo firm Momentus Inc. has been dealt a serious blow by the U.S. Securities and Exchange Commission, which accused both entities of misleading shareholders just weeks before investors were slated to vote on the deal.
The regulator sued Stable Road Acquisition Corp., a special-purpose acquisition company, and Momentus over allegations that the target firm lied about its technology, including a false claim that its propulsion system had been “successfully tested” in space. Stable Road repeated Momentus’s misleading statements in public filings, while failing to conduct adequate due diligence of the company, the SEC said in a Tuesday statement.
Shareholders are scheduled to weigh-in on the merger next month, and the SEC enforcement action marks the first time the regulator has ever sanctioned a SPAC and the company it’s acquiring before an investor vote. SEC scrutiny of SPACs has been ratcheting up significantly this year, with agency officials warning for months that potential perils aren’t being fully disclosed.
“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. “The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders.”
Momentus agreed to go public through a merger with Stable Road in October for an an enterprise value of about $1.2 billion, a price that was later revised lower to $700 million. Stable Road fell more than 10% in after-market trading to $10.45.
Cooling Valuations
While SPAC valuations have cooled in recent months, the market has still been red hot. More than 550 new offerings have listed this year, more than in all of 2020 when about $83 billion flooded into what was once an obscure corner of capital markets. Among those who’ve jumped in are hedge funds, famed Wall Street dealmakers and even celebrities.
The offerings are publicly traded shell companies with no revenues that raise money from investors to buy another company, meaning shareholders are basically betting on the sponsor’s ability to pull off a successful acquisition. The SEC has cautioned that the lucrative payouts that insiders are due to make if deals are consummated aren’t always well understood by investors.
Stable Road and its chief executive officer, Brian Kabot, will pay civil penalties of $1 million and $40,000, respectively. SRC-NI, the Stable Road sponsor, has also agreed to forfeit 250,000 shares it was due to receive if investors approved the merger. Momentus will pay a $7 million fine, the SEC said. Stable Road, Kabot and Momentus all settled without admitting or denying the agency’s claims.
Mikhail Kokorich, Momentus’s former CEO, is fighting the SEC’s allegations.
Kokorich believes Momentus has a “bright future and looks forward to that and the successful resolution of the unfortunate claims brought by the SEC,” his attorney, Tom Gorman, said in an emailed statement.
‘Bright Future’
“We’re pleased to be closing this chapter and moving forward,” said Momentus CEO Dawn Harms. “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.”
An attorney representing Stable Road and Kabot didn’t immediately respond to a request for comment.
“Our enforcement team worked with incredible speed, efficiency and creativity to file today’s actions so that investors will have the benefit of complete and accurate information when voting on the proposed merger,” Melissa Hodgman, acting director of the SEC’s enforcement division, said in the statement.
Quick Review
After Stable Road’s November 2019 initial public offering, the company had 18 months to find a merger target per its charter. Otherwise, it would be dissolved.
Kabot met Kokorich at the end of June 2020 and merger discussions began in earnest the following month. Around August, Stable Road hired a consulting company to perform due diligence but didn’t ask the firm to examine the space mission that Momentus asserted had been a success. The consulting firm started its review of Momentus roughly a month before the merger was announced, the SEC said.
Momentus and Kokorich also concealed that the U.S. government had national security concerns about Kokorich, according to the SEC’s order. Specifically, investors lacked material information about how his affiliation with Momentus could impede the company’s launch schedule and its revenue projections, the regulator said.
(Updates with comments from company and executives, starting in 10th paragraph.)
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