The First SPAC on The Moon!

SEC Charges Stable Road SPAC and Space Startup Momentus with Misleading Claims.

The SEC announced on Tuesday that it charged blank-check company Stable Road Acquisition Corp (SRAC.O), its sponsor SRC-NI, space exploration company Momentus Inc and two executives for misleading claims over their planned merger.

The SEC said the companies and Stable Road Acquisition Company Chief Executive Brian Kabot agreed to pay $8 million to resolve allegations they misled investors about Momentus Inc.'s technology and national security risks associated with its former CEO Mikhail Kokorich.

The entities, settled with the SEC without admitting or denying the allegations. An attorney for Kokorich, who is fighting the SEC's charges in court, said his client "looks forward to a resolution of this matter which is favorable to him."

This marks the latest escalation in the SEC's crackdown on Wall Street's special purpose acquisition company, or SPAC, frenzy, which has reached a record over $100 billion this year.

The SEC's action is the first targeting all sides of a SPAC transaction as well as executives in an investigation that took under a year, an SEC official said.

According to the SEC, Kokorich and Momentus, an early-stage space transportation company, repeatedly told investors that it had "successfully tested" its propulsion technology in space, when its only in-space test had failed to achieve its primary objectives or demonstrate the technology's commercial viability.

The regulator also alleged that Momentus and Kokorich misrepresented the extent to which national security concerns involving Kokorich undermined Momentus' ability to secure governmental licenses essential to its operations. The SEC accused Stable Road, its sponsor and Kabot of negligence-based fraud.

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Transcript

This weekend, Richard Branson became the first man to walk on the moon.  Wait, sorry he became one of the people to fly on a plane that went close to space, but not actually into space.  Well, I guess it went higher than a lot of planes go, and I suppose it is impressive.  It would be more impressive if it was 1950, but still… well done Richard.  At least he has moved on from those hot air balloons he was messing around with a few years ago.  I’m sure he will go down in history for his various aviation reenactments…
Anyhow, to celebrate this monumental achievement, the securities and exchange commission announced on Tuesday that they are charging a space transportation company and a bunch of people associated with it for making misleading claims about their technology.  The company – a SPAC - is called Stable Road Acquisition Company and the charges relate to its proposed merger with Momentus Incorporated.
It is a bit of an unusual case, and I believe it is the first securities-fraud case from the current crop of SPAC’s.  No doubt there will be more.  The SEC has been clear that they are not happy with what has been going on with SPACs, and that they will go after the individuals involved. There are other SPACs where the principals actually admitted to making false statements to investors, and it might be a good bet that those will be of interest to the SEC too.  In truth I think the SEC started out with this one, as they wanted a space theme to celebrate Branson’s historic achievement.
So first what is Stable Road Acquisition Corp, what is momentous and what are they accused of?  Well Stable Road was a SPAC that raised $172.5 million dollars back in November 2019 in order to buy weed.  Or as they worded it in their prospectus “to focus our search on companies in the cannabis industry which are compliant with all applicable laws and regulations.” That’s basically the same
Now, by June of last year, they decided that weed was out and space was in.  (Is this story from the 1960’s??) No… OK.
Now as I explained in an earlier video about SPACS and why investors should be careful with them. SPACS have 18 months to do a deal and charge huge fees, or they have to give all of the money back and lose the few thousand dollars that they invested themselves. So the Stable Road Boyz, found a nice Russian man named Mikhail who said he makes plasma space rockets – or at least that he tries to. Mikhail used words like rideshare, last mile and plasma and explained that another company would put the satellites in space (not Richard Branson – his space ship only goes close to space) but someone else – maybe even Elon Musk, but anyhow the satelites would be in space, and Mickael and his company Momentus would move the satellites into position.  Delivering them the last mile… riseshare… plasma… so on…
Anyhow, very little of this space nonsense matters.  We are running out of time with this SPAC.  We have 18 months to do a deal remember.  
So, what we need to know is that Mikhail had a good story about plasma space rockets, and Stable Road had $172.5 million of weed money and the clock was ticking. Stable road hired a space technology consulting firm (yeah, I guess that’s a thing?) and they agreed that the technology was good and a merger deal was then eh. Shrewdly negotiated.
On top of the SPAC, the team pitched other investors on a PIPE (private investment in public equity) to buy another $175 million of Momentus stock alongside the SPAC merger. All of this was all announced last October.
So I’m sure you are thinking that everything worked out, right?  What could go wrong??  Well the SEC’s lawsuit claims that Mickael was lying to the good people of Stable Road, and they passed those lies on to investors.  So far all of the accused other than Mikhail have settled, agreeing to pay a total of $8 million to the SEC, forfeit some founders’ shares in the SPAC, and let the PIPE investors get their money back if they want to.
What did Mikhail lie about I hear you ask?  Well he did actually have a plasma space rocket – it was named “the El Camino – after a Ute from the 1960’s”. The only problem is that it didn’t work.  Plasma space rockets are not like electric trucks, you can’t just push them down a hill.  The SEC complaint describes what went wrong in great detail, there are space words in the complaint like “hot firings”, “microwave power” “thruster” and “burns”.  The takeaway is that it didn’t work, and they lost it – in space...
Mikhail then went and lied to an esteemed Space publication called “Space News”. He said “Water plasma propulsion is now technologically mature enough to be baselined for operational in-space transportation missions.”  He said all of this in a Russian accent (OK, I don’t know if he has a Russian accent, but I feel giving him one improves the story). As it leads us to his other lies.  He is additionally in trouble with the SEC as he lied about his immigration status and his national-security status. Mikhail was in the U.S. on a work visa, and in 2018 his visa` was revoked. He applied for asylum and that application was denied.  As a foreign national, he could not access parts of Momentus’s technology without an export license. (Listen, I’m as surprised as you are that you need an export license to access the technology in some sort of broken rocket, that I kinda get the impression has a microwave in it. But rules are rules)  He was hardly going to sell this technology to Russia. Russia has rockets that work, water plasma last mile ride sharing rockets can only be sold in silicon valley – or to stoners.
Anyhow, in January of this year, after the merger was signed and announced, Mikhail stepped down as CEO of Momentus and he moved to Switzerland. At this point he is just trying to look like a Bond villain.
So, this case might be a bit of a preview of how weird SEC SPAC enforcement is likely to be going forward.  There is a risk that my YouTube channel will degrade into me reading just reading SEC complaints out word-for-word with a confused look on my face.  Don’t forget to subscribe if you want to watch that…
So just to be clear, this SPAC merger has not actually closed yet. While Mikhail allegedly lied about plasma rockets and microwaves to sell his company, the SPAC’s shareholders still get to vote on the deal. If they don’t like what they are getting or what they read in the SEC order, they can just vote against the deal, or ask for their money back.  SRAC closed at $10.66 today, so if you got in at the IPO price of $10, you have made money so far.  The only problem is that the SPAC traded as high as $27 back in February and so people who bought at that price have lost a lot of money. They have been harmed by the lies they were told and by the quality of due diligence done by the SPAC sponsors. The merger agreement was amended two weeks ago essentially cutting the price of Momentus in half to account for the problems that have since been disclosed. So, if the SPAC investors stay in, they get twice as much equity, but in a company with questionable technology.
One thing we are learning from this case is that if you are a SPAC sponsor, and you are lied to and you then pass those lies on to your investors, the SEC can go after you.  Even if you hired a space technology consulting firm.
One final thing.  That’s all for now, see you next week.