SEC Charges SPAC, Sponsor, Merger Target and CEOs for Misleading Disclosures

SEC Charges SPAC, Sponsor, Merger Target and CEOs for Misleading Disclosures

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print

On July 13, 2021, the Securities and Exchange Commission (“SEC”) announced charges against a special purpose acquisition vehicle (“SPAC”) called Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus, Inc., and Momentus’ Founder and former CEO Mikhail Kokorich. The SEC alleges that all parties involved misled investors with inaccurate claims about Momentus, including details about the firm’s technology and national security risks associated with its former CEO. All parties except for Kokorich are settling with the SEC, with penalties totaling more than $8 million, in addition to an SEC mandate to tailor investor protection undertakings (including the creation of an independent board committee and retention of a compliance consultant) and an agreement that the SPAC sponsor forfeits the shares it stands to receive in the merger.

The SEC’s settled order states that Kokorich represented to investors that Momentus, which is an early-stage space transportation company, had “successfully tested” its propulsion technology in space when it in fact had failed to achieve any mission objectives on its only in-space test. There were also some national security concerns related to Kokorich that were material to Momentus operations. Stable Road and Kabot claimed to have conducted extensive due diligence on Momentus and Kokorich, but any due diligence efforts were ultimately inadequate.

SPACs have been around for decades, but have become more popular in recent years. As of 2020, more than 50 SPACs had been formed in the U.S., which have raised a total of more than $21 billion. While the SEC has begun looking into the operations of SPACs for potential violations, this case marks the first in which the SEC has targeted all sides of the SPAC, including the sponsor and potential merger target.

“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, indicating that the SEC recognizes an incentive for sponsor firms to rush due diligence procedures in favor of a quick profit. “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.”

Anita B. Bandy, Associate Director of the SEC’s Division of Enforcement, also stated that “Our litigation against Kokorich demonstrates our commitment to holding individuals accountable for their statements to investors, which are of particular concern when they are aimed at improperly capitalizing on public interest in popular investment vehicles such as SPACs.” The SEC’s actions with respect to SPACs could parallel their recent interest in “meme stocks” or investing based on ESG factors, in that they are focused on under-regulated investing trends that could allow for shortcuts and fraud.

If you have any questions on the above case or potential participation in a SPAC, please contact us.

Related Posts
Greyline is pleased to announce that we have made the short list for the 2021 HFM U.S. Service Awards in the Best Advisory Firm and Best Technology Firm – Newcomer categories. The award winners will be announced on September 22.