SPAC’s Merger With Space Firm Momentus Threatened by SEC Fine

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.

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 understood by investors.

Stable Road and its chief executive officer, Brian Kabot, agreed to settle the SEC allegations by paying 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. Mikhail Kokorich, Momentus’s former CEO, is fighting the agency’s allegations.

“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.

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