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The U.S. Securities and Exchange Commission (SEC) has been getting tougher with special purpose acquisition companies (SPACs). On July 13, 2021, the SEC announced its first enforcement action aimed at a SPAC since Gary Gensler became its chair. The SEC charged Stable Road Acquisition Corp. and Momentus Inc., a space transportation company and the merger target that went public upon completion of the SPAC merger.

Momentus is a U.S. commercial space company based in Santa Clara, California. The company’s ultimate goal is to bring people into space. Although space transportation is Momentus’s core service, it is not its only focus. Using a proprietary propulsion system, Momentus also plans to move freight such as satellites into different orbits.

The SPAC in Question

Stable Road Acquisition Corp. is a special purpose acquisition company (SPAC). SPACs are publicly traded shell companies that look for private company merger targets. Stable Road Acquisition Corp went public in November 2019. It Initially searched for a deal with a privately-held cannabis company. Brian Kabot, the CEO of Stable Road, previously worked in the cannabis industry, so a focus on cannabis acquisition targets was a logical fit. However, after evaluating several potential acquisition targets, the SPAC abandoned this plan in favor of a merger with Momentus.

SEC Says Inadequate Due Diligence

The SEC alleged that the SPAC conducted inadequate due diligence prior to the merger announcement. Specifically, the SEC claimed that Momentus’s space flight technology was largely unproven, with revenue projections based on this unproven technology. The SEC also raised national security concerns in connection with Momentus’s former CEO Mikhail Kokorich, a Russian citizen. There was concern the technology could fall into the hands of the Russian government which would use it against U.S. space interests. The SEC claimed that insufficient due diligence was conducted to determine the extent of the former CEO’s status as a national security risk.

The Enforcement Action

The enforcement action marks a major move by the SEC and signals that SPAC transactions will be under more scrutiny going forward. The SEC action was against Stable Road Acquisition Corp., Momentus, Stable Road CEO Brian Kabot, and the former CEO of Momentus, Mikhail Kokorich. The SEC charged the companies and their respective CEOs with adopting misrepresentations and misstatements in connection with an inadequately performed due diligence process. It claimed that this subpar due diligence process misled investors.

Soon after news of the SEC enforcement action came out, the company asked Kokorich to step down. The parties agreed to pay $8 million to the SEC to settle the charges. The new CEO of Momentus is John Rood, the former U.S. Under Secretary of Defense for Policy.

SPAC Transactions Can Mislead Investors

“This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from an SPAC merger may conduct inadequate due diligence and mislead investors,” stated SEC Chair Gary Gensler.

Interestingly, the SEC brought charges in the interim period between signing and closing of the merger. Although the SEC issued a cease-and-desist order, the deal successfully closed in August 2021 at a value of approximately $1.2 billion. Shares of the combined company are now trading on the Nasdaq Stock Exchange under the ticker symbol “MNTS.”

With the deal closed and the SEC action behind them, the company is optimistic about the future. “Momentus is well-positioned to meet the needs of the emerging new space economy. The combination of progressively more affordable access to space and increasingly capable small satellites creates a need for our in-space transportation and infrastructure services,” stated CEO John Rood. “We’re excited about the future of the company and the products and services we plan to deliver.”

A SPAC for Space

Momentus hopes to use the raised capital to fly its Vigoride space vehicle to Low Earth Orbit as early as June 2022. This will be subject to approvals from relevant government agencies. The plan is for the Vigoride vehicle to deliver satellites from rockets to specific orbits. Momentus is developing a water plasma-based propulsion system called the microwave electrothermal thruster. It aims to use this innovative system to power its in-space transfer and service vehicles.

Momentus, an early-stage startup, reported no revenue in 2020 and 2021. It projects approximately $5 million in revenue in 2022 and plans to generate $2 billion in revenue by 2027. The company aims to fly 26 space missions per year and to turn a profit by 2024. They also have an agreement with SpaceX to use its rockets in a process known as ride-sharing. CEO John Rood states that Momentus is “launch vehicle agnostic” and is exploring partnerships with other launch providers.

The SEC enforcement action is a cautionary tale for other SPAC deals. It is a warning that the SEC will hold SPACs accountable for the quality of their due diligence. Management teams must prepare to conduct an extensive due diligence process and accept accountability for diligence shortcomings. Under Gary Gensler’s leadership of the SEC, heightened scrutiny of SPAC transactions will continue.