SEC Charges SPAC, Sponsor, Target, and CEO Over Misleading Proposed de-SPAC Transaction Disclosures

On July 13, 2021, the U.S. Securities and Exchange Commission announced charges against special purpose acquisition corporation Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed acquisition target, Momentus Inc., and Momentus’ founder and former CEO Mikhail Kokorich for allegedly misleading claims about Momentus’ space propulsion technology and national security risks associated with Kokorich. The SEC’s litigation is proceeding against Kokorich in the U.S. District Court for the District of Columbia. The SEC announced that all other parties are settling these charges, by agreeing to, among other measures, payment of penalties of more than $8 million, the implementation of certain investor protection undertakings, and the SPAC sponsor’s forfeiture of founder’s shares it stands to receive in connection with the de-SPAC transaction. The announcement comes in advance of a shareholder vote to approve the proposed de-SPAC transaction between Stable Road and Momentus scheduled for August 11, 2021 and highlights the SEC’s continued enforcement interest in SPACs.

This SEC enforcement action arose out of the proposed de-SPAC transaction between Momentus and Stable Road, publicly announced on October 7, 2020. At issue are statements made to Stable Road investors in connection with the proposed de-SPAC transaction (both PIPE and retail investors) that Momentus had “successfully tested” its propulsion technology in space when, in fact, Momentus’ only in-space test had failed to achieve its primary mission objectives or to demonstrate the commercial viability of the technology. The SEC also alleges that Momentus and Kokorich misrepresented the extent to which national security concerns involving Kokorich undermined Momentus’ ability to secure governmental licenses essential to its operations.

According to the SEC’s settled order, these purported misrepresentations and omissions were adopted by Stable Road and incorporated into multiple public filings, most notably, Stable Road’s November 2020 registration statement filed on Form S-4, as well as amendments filed in December 2020 and March 2021, and slide presentations given to potential PIPE investors in connection with the business combination. For example, a presentation given to institutional investors on October 7, 2020 (the day the proposed de-SPAC transaction was announced), claimed that Momentus “successfully tested water based propulsion technology on a demo flight launched mid-2019 – is still operational today.” Kokorich then reiterated that Momentus had “successfully tested our groundbreaking thruster in space” in comments in connection with the presentation. Stable Road then adopted Momentus’ characterization that its technology had been “successfully tested” in its registration statements, which also included company projections that were based, in part, on inaccurate assumptions with respect to rates of commercialization. Moreover, Stable Road touted its “extensive due diligence” even though its due diligence neglected to evaluate — much less confirm — the factual basis of the company’s claims with respect to its technology and the undisclosed national security concerns involving Kokorich.

In connection with these allegations, the SEC charged Momentus and Kokorich with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, for making knowing or reckless misrepresentations and omissions of material fact regarding its propulsion technology and Kokorich’s status as a national security threat — scienter based offenses. The SEC’s order also found that Stable Road violated certain negligence-based antifraud provisions of the federal securities laws, Section 14(a) of the Exchange Act of 1934 and Rule 14a-9 promulgated thereunder, as well as certain reporting and proxy solicitation provisions, namely Section 17(a)(3) of the Securities Act of 1933, by repeating misleading statements in public filings associated with its proposed merger with Momentus. The order also found that the SPAC’s sponsor, and its CEO, caused Stable Road’s Section 17(a)(3) violations.

This is the first SEC enforcement action targeting all parties to a potential de-SPAC transaction, as well as executives, and highlights the SEC’s continued scrutiny of and enforcement interest in SPACs and de-SPAC transactions. In particular, with respect to potential future exposure for SPACs, in connection with the public announcement of these charges, the new SEC Chair Gary Gensler commented that “[t]he fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders.” The SEC further highlighted its desire for the charges to “help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions” and “prevent wrongdoers from benefitting at the expense of investors.” This action underscores the critical importance for SPACs, their boards of directors, and sponsors of adhering to a thorough and well-documented transaction process, including extensive and careful due diligence, and of robust and transparent disclosures of material risks to limit enforcement and litigation risk and minimize costs associated with these risks.

Further details regarding Goodwin’s process-related recommendations, which this enforcement action demonstrates are increasingly vital, can be found here.