On July 13, 2021, the SEC announced its settlement with Stable Road Acquisition Corp. (“Stable Road”), a special-purpose acquisition company (“SPAC”); its CEO; its sponsor; and its proposed merger target, Momentus Inc. (“Momentus”), an early-stage space technology company. The resolution was based on alleged violations of the federal securities laws stemming from material misstatements and omissions related to Momentus’s space technology and national security concerns surrounding Momentus’s former CEO. The SEC has brought charges against and is litigating against Momentus’s former CEO, who was not a party to the settlement.
Last October, Stable Road, the SPAC in question, announced that it had entered into a merger agreement with Momentus. The SPAC filed a proxy statement in November. In January, prior to the shareholder vote, the SEC informed the SPAC and Momentus that it was investigating certain disclosures that had been made in SEC filings, including in connection with the deSPAC transaction. The shareholder vote on the deSPAC is currently scheduled for August 11, 2021, subject to the SEC declaring the registration statement effective.
In its order, the SEC asserts that Momentus made material misstatements and omissions in various SEC filings about (a) successfully testing key technology when the test had not been successful, and (b) national security concerns regarding the former Momentus CEO. According to the SEC, the SPAC repeated these misrepresentations in public filings and otherwise “failed its due diligence obligations to investors” because neither it nor its space technology consultant (a) reviewed the results of Momentus’s in-space test or (b) received sufficient documents to assess the national security risks posed by Momentus’s former CEO. The SPAC CEO participated in the allegedly inadequate diligence and assisted in filing the documents that repeated the misrepresentations.
On this basis, the SEC charged that:
- Momentus violated scienter-based federal securities laws (Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder);
- The SPAC violated negligence-based federal securities laws as well as certain reporting and proxy solicitation provisions (Sections 17(a)(2) and (3) of the Securities Act, 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);
- The SPAC CEO violated provisions of the federal securities laws related to proxy solicitations (Section 14(a) of the Exchange Act and Rule 14a-9 thereunder); and
- The SPAC CEO and the sponsor caused Stable Road’s violation of Section 17(a)(3) of the Securities Act of 1933.
The settling respondents have agreed to certain undertakings. The parties agreed to provide PIPE investors with the right to terminate prior to the shareholder vote, the SPAC sponsor agreed to forfeit its founders’ shares, and the target agreed to adopt and improve various compliance measures and retain a compliance consultant. Without admitting or denying the SEC’s findings, the target, the SPAC, the SPAC CEO, and the sponsor consented to an order requiring them to cease and desist from future violations. The target, SPAC, and SPAC CEO will pay civil penalties of $7 million, $1 million, and $40,000, respectively.
The SEC’s enforcement action against Stable Road and the related parties further underscores the SEC’s continuing interest in SPACs. Since becoming chair of the SEC earlier this year, Gary Gensler has repeatedly spoken about risks presented by SPACs, including in his testimony before the House Appropriations Committee in May 2021. In announcing the Stable Road resolution, Chair Gensler took the somewhat unusual step of personally commenting on the action, stating that “[t]his 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,” and that this action “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.”