The U.S. Securities and Exchange Commission (“SEC”) has brought the first enforcement action against a special purpose acquisition company (“SPAC”) and its major participants, demonstrating: (1) the importance of conducting adequate due diligence in the de-SPAC process and (2) the SEC’s heightened focus on these transactions and their related public filings. With this action, the SEC staff has signaled that they will be carefully evaluating statements in proxy solicitations to SPAC investors and that any material misstatement or omission in connection with a proxy solicitation will be subject to liability under Sections 10(b) and 14(a) of the Securities and Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder.
Background
Stable Road Acquisition Corp. (“Stable Road”) was a SPAC that completed its initial public offering in November 2019, with an 18-month window to complete a business combination. On October 7, 2020, the SPAC announced a merger with its target, Momentus, Inc. (“Momentus”), an early-stage space transportation company, and raised $175 million of capital by entering into subscription agreements with private investment in public equity (“PIPE”) investors in exchange for shares in the merged company after the business combination was approved.
The Enforcement Proceeding
On July 13, 2021, before the merger was complete, the SEC charged Momentus and its CEO, Mikhail Kokorich, with scienter-based fraud under Section 17(a) of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) and Rule 10b-5 of the Exchange Act. The SEC alleged that Momentus made misrepresentations to Stable Road and the PIPE investors in public filings about propulsion technology and ability to obtain licenses.
In the same proceeding, the SEC also charged Stable Road, the sponsor, SRC-NI Holdings, LLC (the “Sponsor”), Stable Road’s CEO and SRC-NI managing member, Brian Kabot, with violations under Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a) and 14(a) of the Exchange Act and Rule 14a-9. The SEC alleged that the SPAC issued misleading statements in investor presentations and public filings arising from its failure to perform reasonable due diligence, which the SEC stated was highly compressed due to the liquidation window.
Outcome
Without admitting or denying the SEC allegations, Momentus, Stable Road and Kabot have consented to more than $8 million in civil penalties. Kokorich is contesting the SEC’s charges against him which are currently pending in federal court in the District of Columbia. In addition, Stable Road and Momentus have agreed to offer every PIPE investor the right to terminate its subscription agreement and the Sponsor has agreed to forfeit its rights to 250,000 founder shares. Momentus has agreed to retain an “Independent Compliance Consultant” to review its ethics and compliance programs and issue a written report to the SEC with its findings and recommendations.
Big Picture
Given the outcome in Stable Road, along with recent SEC staff statements focusing on the de-SPACing process, we expect a renewed focus on these transactions for the following reasons. First, as SEC Chair Gary Gensler has warned that conflicts of interest are inherent in SPACS: “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.” Additionally, the SEC has made it crystal clear that SPACS are expected to conduct their own due diligence and cannot rely on representations from the target company, for as Mr. Gensler has stated, “The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders.”
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This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its content. If you have any questions concerning this memorandum, please contact Keith Billotti at (212) 574-1274 or Jack Yoskowitz at (212) 574-1215.
