Last month, the SEC announced yet another enforcement action involving a special purpose acquisition company (“SPAC”).
A SPAC is a publicly traded shell company that has no underlying business. First, the SPAC sells shares to the public just like a traditional IPO. Then, the SPAC places the proceeds from the IPO into a trust account, after which the SPAC has 2 to 3 years to identify a private target company (i.e., a private company with an underlying operating business) that the SPAC will merge into. This business combination is sometimes referred to as the “de-SPAC” transaction. The shareholders of both the SPAC and the target company must approve the de-SPAC transaction. If either the SPAC or the target mislead investors in connection with that approval, the SPAC and the target could be liable for investor fraud.
SPACs are on the rise, and investors should be careful when trading shares in these companies.
On July 13, 2021, the SEC alleged that pre-merger disclosures made by Stable Road Acquisition Company, a SPAC, and Momentus, Inc., an early-stage space exploration company and the target of the de-SPAC transaction, were misleading to investors and charged the SPAC, its sponsor SRC-NI, the sponsor’s CEO Brian Kabot, Momentus, and Momentus’s CEO Mikhail Kokorich for fraud.
Specifically, the SEC alleged that Kokorich and Momentus repeatedly told investors that Momentus had successfully tested some of its space transportation technology when it had not, and misrepresented the extent to which national security concerns could negatively impact Momentus’s ability to secure necessary governmental licenses.
Notably, the SEC charged the SPAC and its sponsor for the fraudulent statements made by Momentus, even though Kokorich and Momentus lied to the SPAC regarding the misstatements. The SEC alleged that the SPAC had failed to conduct required due diligence and, as a result, should also be held liable for the fraud.
The defendants agreed to pay penalties totaling more than $8 million to settle the SEC’s allegations. The SEC’s press release announcing the settlement is available here.
If you or someone you know has been harmed by a SPAC-related investment, one of our attorneys may be able to help. Contact Fishman Haygood today.