SEC Charges SPAC, Sponsor, Merger Target and CEOs of Alleged Misleading Disclosures in Proposed De-SPAC Transaction – Corporate / Commercial Law
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On July 13, 2021, the Securities and Exchange Commission (SEC) announced charges against special purpose acquisition company Stable Road Acquisition Company, its sponsor and CEO, the PSPC proposed merger target, Momentus Inc., and Momentus founder and former CEO Mikhail Kokorich for misleading claims about Momentus’ technology and the national security risks associated with Kokorich. All parties except Kokorich reached a deal with the SEC without admitting or denying the SEC’s findings.
SEC Charges and Penalties Against PSPC, its CEO and Sponsor Highlight the Importance of PSPC Directors and Officers to Perform Thorough Due Diligence and Independently Verify Material Representations of the Proposed Target . The case also demonstrates the SEC’s willingness to charge a SPAC and its sponsors even when the main alleged wrongdoing is committed by the target.
Stable Road is a Special Purpose Acquisition Company (SPAC) incorporated for the purpose of amalgamating with a private company with the effect of making 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 a business combination is completed.
Momentus is a privately held company seeking to provide “last mile” satellite positioning services with space propulsion systems powered by water plasma microwave (TEM) electrothermal thrusters.
On October 7, 2020, Stable Road and Momentus announced that they had entered into a merger agreement whereby Stable Road would make Momentus public. The companies also announced that Stable Road has entered into subscription agreements with private investors in public shares (PIPE), under which PIPE investors have agreed to buy $ 175 million in shares of the merged company. The proposed transaction is subject to shareholder approval.
According to the settlement order, Stable Road investors were misled in two areas regarding 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 space test failed. successful in meeting primary mission objectives or demonstrating the commercial viability of technologies.
Second, Momentus distorted the extent to which national security concerns involving Kokorich undermined the company’s ability to obtain the required government licenses essential to its operations. Investors lacked material information on the extent to which Korkorich’s affiliation with Momentus compromised the company’s launch schedule and revenue projections, which were based in part on assumptions about when to launch Korkorich’s first commercial launch. the society.
The order finds that Stable Road repeated Momentus’ misleading statements in public documents associated with the proposed merger and breached its due diligence obligations to investors. The order concludes that Stable Road’s breaches of due diligence aggravated Momentus’ misrepresentations and omissions and resulted in the release of materially false and misleading information to investors.
Specifically, the order finds that Stable Road’s due diligence with respect to Momentus was conducted within a tight timeframe and that it unreasonably failed both to probe the basis for Momentus’ claims that its technology had been “successfully tested” in space, and to respond to red flags regarding national security and foreign property risks. Stable Road’s public documents also included Momentus’ financial projections, which were based in part on the assumption that the Momentus booster was nearing commercial viability and included projected revenues based on a launch schedule that ignored the l effect of any adverse US government decision based on national security concerns regarding Kokorich. On June 30, 2021, Stable Road filed an amendment to its Form S-4 in which Momentus’ financial projections were significantly reduced due to a one-year delay in launching its inaugural payload caused by decisions adverse licensing resulting from Kokorich’s national security risks. The amended record also revealed that the valuation of Momentus’ business had been reduced from over $ 1.1 billion to less than $ 600 million.
SEC Chairman Gary Gensler pointed out that “Momentus’ lied to Stable Road does not relieve Stable Road of its inability to do due diligence to protect shareholders” and that “this case illustrates the inherent risks. to PSPC transactions, because those who stand to reap significant profits from a PSPC merger may exercise inadequate due diligence and mislead investors.
SEC Order Finds Stable Road Violated Antifraud Negligence Provisions of Federal Securities Laws, Particularly Sections 17 (a) (2) and (3) of the Securities Act, Section 14 (a) of the Exchange Act and rule 14a- 9 below, which prohibits the solicitation of a proxy by means of false representations and omissions, and section 13 (a) of the Exchange Act, a disclosure provision that prohibits issuers from filing reports containing false or misleading information. Stable Road agreed to pay a civil fine of $ 1 million.
The order also holds the CEO of Stable Road responsible for signing misleading public documents and holds his sponsor accountable for the CEO’s actions. As a result, the order finds that the CEO and sponsor of Stable Road 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 which follows. The CEO of Stable Road agreed to pay a civil fine of $ 40,000 and his sponsor agreed to relinquish 250,000 founder’s shares that he was otherwise entitled to receive upon approval of the shareholders of the business combination. The CEO is one of the three executive members of the sponsor.
As for Momentus, SEC Order Finds Violated Scientist-Based Anti-Fraud Provisions of Federal Securities Laws, Including Section 10 (b) of the Exchange Act and Rule 10b-5 resulting, and caused violations of Stable Road securities laws. Momentus has agreed to pay a civil fine of $ 7 million, create a standing committee of its board of directors composed exclusively of independent directors with no previous compliance record, and retain the services of an independent compliance consultant for two years.
Momentus and Stable Road have also agreed to grant PIPE investors the right to terminate their subscription contracts prior to a shareholder vote to approve the merger. The merger is expected to be finalized in August 2021.
The case against the defendants who settle is In Momentus Inc., Stable Road Acquisition Corp., SRC-NI Holdings LLC and Brian Kabot, file n ° 3-20393, before the SEC. The SEC case against Kokorich is pending before the United States District Court for the District of Columbia, titled SEC c. Kokorich, Case n ° 1: 21-CV-1869 (DDC July 13, 2021). Winston & Strawn will continue to monitor these and other developments in the law.
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