On July 13, 2021, the Securities and Exchange Commission (“SEC”) announced one of its first securities fraud enforcement actions against a Special Purpose Acquisition Company, or SPAC, called Stable Road Acquisition Corp. (“Stable Road”), as well as its sponsor SRC-NI Holdings, LLC (“SRC-NI”), its CEO Brian Kabot (“Kabot”), the target company Momentus Inc. (“Momentus”), and Momentus’s former CEO Mikhail Kokorich (“Kokorich”). Stable Road, SRC-NI, Kabot, and Momentus have all already settled with the SEC, agreeing to penalties totaling over $8 million, while the SEC’s litigation against Kokorich is proceeding in the U.S. District Court for the District of Columbia.

The SEC’s settled order and the complaint against Kokorich allege violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 14(a) of the Exchange Act and Rule 14a-9 thereunder, and Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-11 thereunder, for allegedly misleading claims made about Momentus’s performance and technology, as well as national security risks associated with Kokorich. Specifically, the SEC alleges that Kokorich and Momentus misrepresented to investors that Momentus had successfully tested its key technology in space in 2019, when, in reality, that test “failed to meet Momentus’s own public and internal pre-launch criteria for success, and was conducted on a prototype that was not designed to generate commercially significant amounts of thrust.” Settled Order at ¶ 4. The SEC further alleges that Kokorich and Momentus “concealed and made false statements about U.S. government concerns with national security and foreign ownership risks posed by Kokorich, including concerns related to his affiliation with Momentus.” Id. at ¶ 5. Finally, the SEC alleges that Stable Road’s due diligence of Momentus was insufficient to discover the truth of these misrepresentations and resulted in the dissemination of materially false and misleading information to investors in Stable Road’s public filings, including registration statements signed by Kabot, which incorporated Momentus’s and Kokorich’s false and misleading claims and caused investors to be misled about material aspects of Momentus’s business. Id. at ¶ 6. These alleged misrepresentations were passed on to Stable Road’s investors numerous times, including in the slide presentations made by Stable Road and Momentus to potential PIPE investors before the merger was publicly announced, id. at ¶ 30, in their presentation to institutional investors and analysts following the merger announcement, id. at ¶ 31, and in Stable Road’s S-4 registration statement and amendments thereto which were each signed by Kabot, id. at ¶¶ 32-33, 57-60.

The SEC argues that each of these misrepresentations and omissions were material to investors. Although the SEC brought these charges before the merger had closed, and the shareholders could still vote against the merger and potentially redeem their shares, this does not disclose the possibility of harm to investors. Indeed, Stable Road’s shares are publicly traded and the stock closed as high as $27.42 per share on February 9, 2021, but was down to $10.66 on July 14, 2021, the day after the SEC’s charges were announced. Most notable about the SEC’s allegations in this case, however, is the clear message that it intends to hold SPAC sponsors liable for misrepresentations made by target companies that make their way into the SPAC’s investor disclosures. Indeed, in the SEC’s press release detailing the case, SEC Chair Gary Gensler states proclaims:

“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. . . . Stable Road, a SPAC, and its merger target, Momentus, both misled the investing public. The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”

It is clear that the SEC intends to monitor the SPAC space closely and will not hesitate to bring enforcement proceedings against SPACs, and those who control them, if the SEC believes they have failed to fulfill their diligence and disclosure obligations to public shareholders.