A SPAC Enforcement Case
By George Wilson
As we have discussed in our SPAC Life Cycle: Business, Legal and Accounting Considerations Forum and our SPACs in the SEC Spotlight One-hour Briefing, the SEC is focused on assuring investors have the information they need, and are not mislead, when considering investing in SPACs.
On July 13, 2021, the SEC emphasized this focus with the announcement of an enforcement action against a SPAC, Stable Road Acquisition Company, its sponsor, its CEO, the SPACs intended merger target, and the former CEO of the merger target. The merger target, Momentus Inc., is an early-stage space transportation company. As you can read in the related Press Release, Order, and Complaint, the SEC found that the companies and their CEOs misrepresented information about:
Test results of Momentus’ propulsion system,
Various national security concerns surrounding Momentus’ former CEO,
The extent of due diligence for the deSPACing transaction, and
Other merger-related matters.
All the parties, except for the former CEO of Momentus, are settling with the SEC. The settlements involve penalties of more than $8 million and tailored investor protection undertakings. Another significant part of the settlement is that the sponsors will forfeit their founders’ shares if the merger, currently scheduled for August 2021, is approved.
The SEC’s litigation is proceeding against the former CEO of Momentus.
Interestingly, Chair Gensler included comments about the case in the related Press Release, making this statement:
“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”
This case is a great reminder to carefully consider all the SEC’s guidance for SPAC transactions. You can find much of that guidance in CorpFin Disclosure Guidance Topic 11, this Statement from the Acting Chief Accountant, this Staff Statement from CorpFin, and this Statement about warrant accounting from the Chief Accountant and Acting Director of CorpFin.
As always, your thoughts and comments are welcome.