SEC Says It Misled SPAC Investors About Space Deal

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A planned merger involving a startup space transportation company may not come off the ground after securities regulators bring in one of the first major enforcement actions targeting a cash-rich blank check company.

The Securities and Exchange Commission said Tuesday it has reached a civil agreement with several parties involved in the planned merger of Momentus, a company that says it has developed unique propulsion technology, and Stable Road Acquisition, a special-purpose buyout.

Regulators said that when the test failed, investors were misled into believing that the propulsion system had been successfully tested in space.

Hundreds of speculative special-purpose buyouts, or SPACs, have raised nearly $200 billion from investors in the last 18 months – an explosion that has increased regulatory scrutiny. space ventures has been among the popular targets of these companies.

However, a number of start-ups that have merged with or announced plans to merge with blank check companies have exposed investigations by the SEC while investigating possible abuses in the SPAC market.

“This case illustrates the risks inherent in SPAC transactions, as those who would reap substantial gains from a SPAC merger could do poor due diligence and mislead investors,” SEC chairman Gary Gensler said in a statement. Said.

In its settlement decision, the SEC said Stable Road did not do enough to determine whether its claims about Momentus’ rockets were true.

“The fact that Momentus lied to Stable Road does not take away the fact that Stable Road did not do its due diligence to protect shareholders,” Mr. Gensler said.

Securities regulators also said that with just a month before shareholder voting for the planned $566 million merger, the companies are hiding critical “national security risks” associated with Momentus founder and former CEO Mikhail Kokorich.

A few years ago, the Foreign Investment Committee in the United States, an intergovernmental body, considered Mr. Kokorich a security risk. Government concerns prompted him to resign from the company in January, two months after the merger was announced. The SEC said its shares were placed in a trust.

Under the terms of the deal, Momentus, Stable Road, its sponsor SRC-NI, and its CEO, Brian Kabot, agreed to pay a fine of $8 million. Mr Kokorich failed to settle with the SEC, and regulators filed a civil complaint against him in federal court in Washington, claiming the government was “reckless” or potentially reckless in not sharing with Stable Road about his concerns.

Mr Kokorich, a Russian national living in Switzerland, could not be immediately reached for comment. His lawyer, Thomas Gorman, said Mr Kokorich “believes the firm has a bright future”.

“The SEC’s claims are unfortunate, but he awaits their decision in the most favorable way for him,” Gorman added.

The SEC reported to Stable Road in January that the agency was investigating the planned merger, the company had previously announced. The deal between the two companies was shaky even before the SEC action; Stable Road noted in a regulatory filing that it has “experienced a number of operational and regulatory delays.”

The level of due diligence that owners of blank check companies do when choosing their merger partners is one of the criticisms of the SPAC market – especially with so many cash-rich companies chasing startups.

Normally, when a SPAC raises funds from investors in an initial public offering, these funds are returned to investors if they cannot find a company to buy them within two years. Stable Road raised approximately $172 million in an IPO in November 2019.

While settling with the SEC, Stable Road, Momentus, and Mr. Kabot have neither admitted nor denied the allegations. The parties agreed to allow a private settlement to get investors’ money back together to help pay off the deal.

The SEC said the deal and the litigation against Mr. Kokorich would provide Stable Road shareholders with sufficient information on whether to approve the deal.

Stable Road climbed as high as $25 per share in January, but has recently traded for less than half that.

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