SEC grounds space company, SPAC

A space exploration company and its blank-check company backers have agreed to pay more than $8 million to settle SEC claims that they mislead investors about the state of their technology and the national security risks of a key executive.

Momentus and its special purpose acquisition company, Stable Road Acquisition Corp, announced a merger agreement last October. They got commitments of up to $175 million from private investors. The companies and their executives claimed that Momentus had “successfully tested” its key product, a microwave electro-thermal water plasma thrust designed to move satellites into custom orbits.

“In fact,” the Commission said in a July 13 settlement order, “that 2019 test failed to meet Momentus’s own public and internal pre-launch criteria for success and was conducted on a prototype that was not designed to generate commercially significant amounts of thrust.”

‘A halt’

SEC chairman Gary Gensler has put private fund reforms at the top of his regulatory agenda. He has been openly skeptical of SPACs. The market appears to be with him. News reports circulated on the same day as the Stable Road settlement was announced show that the pace of SPACs bringing new companies to markets has chilled. In April, Goldman Sachs warned that the SPAC industry had “screeched to a halt.”

The Stable Road case seems to be a near-perfect overlay for Gensler’s reform ambitions. Not only did Momentus and Stable Road make “materially false” claims about the success of Momentus’ thruster, they also hid the US government’s increasing concerns about Momentus’ then-CEO Mikhail Kokorich, the Commission says.

Kokorich, 45, is a Russian magnate who lives in Switzerland. Since 2018, the Commission claims in the settlement order, “multiple US government agencies have expressed national security concerns about Kokorich, a fact that was well known to both Kokorich and Momentus but never disclosed to investors.”

‘Material concerns’

As early as April 2018, the Committee on Foreign Investment in the United States told Kokorich it considered him a “threat” to national security. Immigration officials yanked his work visa the following June and denied his application for a green card. Kokorich applied for asylum, but authorities denied it citing “inconsistencies…with regard to political affiliations and activities in Russia.” Authorities scheduled him for a deportation hearing.

Kokorich’s security status was essential to Momentus, the SEC says. “If Momentus or its launch partners are unable to obtain the necessary licenses,” the settlement order states, “Momentus cannot participate in launches and thus cannot execute on its business plan. The US government’s national security-related concerns about Kokorich therefore posed a significant threat to Momentus’s ability to participate in launches and generate meaningful revenue.”

Disclosure, due diligence problems

In a Form S-4 filed in November 2020, Stable Road said that the US government had ordered Kokorich to give up his ownership in another space company, but it hid the government’s “express concerns” with Kokorich himself, the settlement order states.

Kokorich resigned from Momentus in January but it was too little, too late, the Commission says. Among other things, Stable Road is written up for failing to take its due diligence seriously.

The cases

Under the settlement order, Momentus has agreed to reorganize its board and leadership and to pay $7 million in fines. Stable Road will offer its investors a chance to cancel their subscriptions and pay a $1 million penalty. Stable Road CEO and Board Chair Brian Kabot, 43, will pay $40,000 in fines. Stable Road’s holding company, SRC-NI (of which Kabot is a managing member), will give up 250,000 founders’ shares in Momentus.

All of the parties also have agreed to cooperate with Commission staff on their follow-up investigations.

Kokorich has fought the allegations so far. The SEC filed a civil suit against him in the Circuit Court for the District of Columbia. Efforts to reach him for comment have been unsuccessful.

This article first appeared in affiliate publication Regulatory Compliance Watch