SEC Charges SPAC, Sponsor, Merger Target, and CEOs for Alleged Misleading Disclosures in Connection with Proposed De-SPAC Transaction

On July 13, 2021, the Securities and Exchange Commission (SEC) announced charges against special purpose acquisition corporation Stable Road Acquisition Company, its sponsor and CEO, the SPAC’s proposed merger target, Momentus Inc., and Momentus’s founder and former CEO, Mikhail Kokorich, for misleading claims about Momentus’s technology and about national security risks associated with Kokorich. All parties except Kokorich have entered into a settlement with the SEC without admitting or denying the SEC’s findings.

The SEC’s charges and penalties against the SPAC, its CEO, and sponsor emphasize the importance of SPAC directors and officers conducting thorough due diligence and independently verifying material representations of the proposed target. The matter also demonstrates the SEC’s willingness to charge a SPAC and its sponsors even where the alleged primary wrongdoing is done by the target.

Stable Road is a special purpose acquisition company (SPAC) formed for the purpose of merging with a privately held company with the effect of taking that company public. In its November 2019 initial public offering, Stable Road raised $172.5 million, which is held in trust for the benefit of shareholders until the completion of a business combination.

Momentus is a privately held company that seeks to provide “last mile” satellite positioning services with in-space propulsion systems power by microwave electro-thermal (MET) water plasma thrusters.

On October 7, 2020, Stable Road and Momentus announced that they had entered into a merger agreement through which Stable Road would take Momentus public. The companies also announced that Stable Road had entered into subscription agreements with private investment in public equity (PIPE) investors, pursuant to which the PIPE investors agreed to purchase $175 million worth of shares in the merged company. The proposed transaction is subject to stockholder approval.

According to the settlement order, Stable Road investors were misled in two areas with respect to the proposed business combination. First, Momentus claimed that in 2019 it had “successfully tested” its MET water plasma thruster in-space, when, in fact, the company’s only in-space test had failed to achieve its primary mission objectives or demonstrate the technologies’ commercial viability.

Second, Momentus misrepresented the extent to which national security concerns involving Kokorich undermined the company’s ability to secure required governmental licenses essential to its operations. Investors lacked material information about the extent to which Korkorich’s affiliation with Momentus jeopardized the company’s launch schedule and revenue projections, which were based in part on assumptions about the timing of the company’s first commercial launch.

The order finds that Stable Road repeated Momentus’s misleading statements in public filings associated with the proposed merger and failed in its due diligence obligations to investors. The order finds that Stable Road’s due diligence failures compounded Momentus’s misrepresentations and omissions and resulted in the dissemination of materially false and misleading information to investors. 

Specifically, the order finds that Stable Road’s due diligence of Momentus was conducted in a compressed timeframe and unreasonably failed both to probe the basis of Momentus’s claims that its technology had been “successfully tested” in-space, and to follow up on red flags concerning national security and foreign ownership risks. Stable Road’s public filings also included Momentus’s financial projections, which were based in part on the assumption that Momentus’s thruster was approaching commercial viability and included projected revenue based on a launch schedule that failed to consider the effect of any adverse decisions by the U.S. government based on national security concerns about Kokorich. On June 30, 2021, Stable Road filed an amendment to its Form S-4 in which Momentus’s financial projections were considerably reduced due to a year-long delay to its inaugural payload launch caused by adverse licensing decisions stemming from Kokorich’s national security risks. The amended filing also disclosed that the enterprise valuation of Momentus had been reduced from more than $1.1 billion to less than $600 million.

SEC Chair Gary Gensler emphasized that “the fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders,” and that “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.”

The SEC’s order finds that Stable Road violated negligence-based antifraud provisions of the federal securities laws, specifically Sections 17(a)(2) and (3) of the Securities Act, Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, which prohibit the solicitation of a proxy by means of materially false statements and omissions, and Section 13(a) of the Exchange Act, a reporting provision that prohibits issuers from filing reports containing materially false or misleading information. Stable Road has agreed to pay a civil penalty of $1 million.

The order also holds Stable Road’s CEO accountable for signing the misleading public filings, and holds its sponsor accountable for the CEO’s actions. As a result, the order finds that Stable Road’s CEO and sponsor violated Section 17(a)(3) of the Securities Act, and that the CEO violated Section 14(a) of the Exchange Act and Rule 14a-9 thereunder. Stable Road’s CEO agreed to pay a civil penalty of $40,000, and its sponsor has agreed to forfeit 250,000 founders’ shares that it was otherwise entitled to receive upon shareholder approval of the business combination. The CEO is one of three managing members of the sponsor.

As to Momentus, the SEC’s order finds that it violated scienter-based antifraud provisions of the federal securities laws, including Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and caused Stable Road’s securities laws violations. Momentus has agreed to pay a civil penalty of $7 million, create a permanent committee of its Board of Directors composed exclusively of independent directors with no compliance history, and retain an independent compliance consultant for two years.

Momentus and Stable Road have also agreed to provide PIPE investors with the right to terminate their subscription agreements prior to the shareholder vote to approve the merger. The merger is projected to close in August 2021.

The matter against the settling defendants is In the Matter of Momentus Inc., Stable Road Acquisition Corp., SRC-NI Holdings LLC and Brian Kabot, File No. 3-20393, before the SEC. The SEC’s case against Kokorich is ongoing in the United States District Court for the District of Columbia, styled SEC v. Kokorich, Case No. 1:21-CV-1869 (D.D.C. July 13, 2021). Winston & Strawn will continue to monitor these matters and other developments in the law.