The U.S. Securities and Exchange Commission (“SEC”) has brought an enforcement action against a special purpose acquisition company (“SPAC”) and its major participants, highlighting enhanced regulatory scrutiny of SPACs and underscoring the importance of following appropriate diligence and other practices in the de-SPAC process.

             On July 13, 2021, the U.S. Securities and Exchange Commission announced that it had brought an enforcement action against Stable Road Acquisition Company (“Stable Road”), its sponsor, SRC-NI (“SPAC Sponsor”), its CEO Brian Kabot, Stable Road’s proposed merger target, Momentus Inc., and Momentus’ founder and former CEO Mikhail Kokorich for their involvement in a SPAC business combination.  Stable Road is a SPAC that completed its initial public offering of 17,250,000 units at a price of $10.00 per unit, generating gross proceeds of $172.5 million, on November 13, 2019.  Momentus, a Delaware corporation, is a privately-held space transportation company that plans to offer in-space infrastructure services.  The two companies announced a business combination in October 2020 that would result in Momentus becoming a public company. 

            The SEC alleged that, ahead of a proposed business combination, (i) the respondents made materially misleading statements in their public disclosures surrounding (a) Momentus’ technology and (b) national security risks associated with Kokorich; and that (ii) Stable Road and the SPAC Sponsor made misleading disclosures compounded by the SPAC Sponsor’s insufficient due diligence.  All parties except Kokorich settled with the SEC, with total penalties of over $8 million, the SPAC Sponsor’s forfeiture of its founder shares, an undertaking to give PIPE investors the ability to terminate their subscription agreements prior to the shareholder vote to approve the merger, and tailored investor protection undertakings.  The SEC has filed a complaint against Kokorich in federal court based on related conduct.

            The SEC further alleged that Momentus and Kokorich repeatedly told public investors that they had “successfully tested” Momentus’ key technology in space when, in fact, the test had failed to achieve its primary mission and did not even meet Momentus’ own public and internal pre-launch criteria for success.  In addition, the SEC claimed that Momentus and Kokorich made false claims regarding U.S. government concerns about national security and foreign ownership risks posed by Kokorich, a Russian citizen residing in Switzerland, and that they concealed doubts about Momentus’ ability to secure essential governmental licenses. 

            Stable Road, the SPAC Sponsor and Kabot are accused of repeating these alleged material misrepresentations in their own public filings while also failing to review the in-space test and to follow up on red flags concerning the national security risks raised during their due diligence.  SEC Chair Gary Gensler stated in his remarks that:  “The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence.”

            The SEC’s order asserts violations of antifraud provisions of the federal securities laws, including scienter-based charges against Momentus for fraud under the Securities Act and Exchange Act.  It asserts negligence-based charges of fraud and violations of reporting and proxy solicitation provisions by the SPAC itself (Stable Road), and that Kabot and the SPAC Sponsor caused Stable Road’s violation of the antifraud “scheme” liability provision (Section 17(a)(3) of the Securities Act).  The complaint filed  against Kokorich asserts that he violated the antifraud provisions with scienter, among other claims.

            As noted above, this action is one of the first of an expected series of potential enforcement actions related to SPACs.  Given the rapid growth in this sector over the past few years, the SEC’s Enforcement Division has a working group focused on SPACs, and we expect more actions to come.  Activity from the Enforcement Division follows staff guidance and remarks earlier this year on SPACs relating to the use of projections, accounting methodologies and celebrity involvement with SPACs.  Future enforcement actions may focus on disclosures in public filings, including those relating to risks regarding conflicts of interest in SPAC transactions, with a general focus on protecting investors and in particular retail investors.  With this in mind, we offer a few practice considerations:

  • Establish and Execute upon an Appropriate Diligence Process – Parties to a SPAC business combination transaction should carefully consider and implement an appropriate and tailored diligence process.  Though SPAC business combinations operate on a different timeline than traditional IPOs, parties should avoid shortcuts in the due diligence process to accommodate compressed timelines.  The SEC’s enforcement  action shows that the SEC will scrutinize the due diligence process of private company targets by SPACs, their sponsors and other transaction participants.
  • Thoroughly Investigate Core Business and “Red Flag” Issues – The SEC pointed to two alleged diligence failures in the Momentus action. Transaction parties are reminded to appropriately diligence core business and operational issues that inform the target company’s prospects as well as “red flag” issues such as those that may arise in connection with management background investigations or company regulatory matters.  Given previous SEC staff guidance on the topic, diligencing forward looking information, including a target’s financial projections and the underlying assumptions, should be a high-priority item for all transaction participants.
  • Take Action to Address Areas of Concern – In the recent enforcement action, the SEC notably took action even before the proxy statement / prospectus was finalized and sent to shareholders. SPACs and their sponsors should recognize that the SEC expects them to act on the findings that arise from the due diligence process.  Not only must public disclosures be materially accurate, but SPACs and sponsors may need to consider other more significant actions based on their findings, which could include management or operational changes at the target company or walking away from the deal altogether.
  • Penalties Will Be Tailored to SPAC Transactions – The remedies in the settlement of this action were tailored to the workings of a SPAC transaction. The forfeiture of founder shares by the Sponsor and the ability of PIPE investors to terminate their subscription agreements were both substantive steps designed to address the SEC’s analysis of realities of SPAC transactions, including the economic incentives of the various transaction participants.  In addition, the requirement that the target company establish an independent board committee and engage an independent consultant to conduct a comprehensive ethics and compliance program assessment relating to disclosure practices underscore that the SEC will focus on whether the target company is prepared to become a public company. 

            We believe that, from the SEC’s perspective, cases like this serve to force a better alignment of incentives of parties to a SPAC transaction with the interests of investors and improve public disclosures that investors rely on when making investment and voting decisions.  From the perspective of SPAC transaction participants, this case serves as a forceful reminder to thoroughly conduct due diligence, take seriously the findings of the due diligence process, and consider the implications of such findings in light of required disclosures to investors and their investment decision making process.

Copies of the SEC’s public announcement, order and complaint are available here: 

SEC.gov | SEC Charges SPAC, Sponsor, Merger Target, and CEOs for Misleading Disclosures Ahead of Proposed Business Combination

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Photo of Steven R. Burwell Steven R. Burwell

With over 20 years of experience advising on and executing capital markets transactions, Steve Burwell focuses on corporate and securities law matters and public company representation across all industries, including, but not limited to, financial services, healthcare and life sciences.

Steve offers clients…

With over 20 years of experience advising on and executing capital markets transactions, Steve Burwell focuses on corporate and securities law matters and public company representation across all industries, including, but not limited to, financial services, healthcare and life sciences.

Steve offers clients extensive experience within the banking industry that makes him uniquely positioned to counsel issuers and underwriters on a wide array of debt and equity capital markets transactions. Steve has enjoyed a significant and lengthy career at Deutsche Bank, holding various legal positions within the organization. His most recent role was that of Managing Director and Associate General Counsel, Head of Corporate Finance/Global Capital Markets Legal in the Americas.

In addition to his tenure at Deutsche Bank, Steve has practiced in the New York offices of major international law firms, where he focused on corporate and securities law.

Steve has worked on numerous cross-border transactions for European, Asian and Latin American issuer clients selling securities in the U.S. Within the equity capital markets space, he has done initial public offerings, follow-on offerings, secondary offerings, block trades, Rule 144 sales, private placements, registered directs, Private Investments in Public Equities (PIPEs), convertible bond/preferred offerings and special purpose acquisition company (SPAC) transactions.

Steve previously served on the board of the non-profit Farm & Wilderness Foundation, which provides summer camps and programs focused on social justice and environmental sustainability for children and teens, and also previously served on the board of non-profit Brooklyn Friends School, a college preparatory Quaker school that supports a culturally-diverse educational community from preschool through 12th grade.

Photo of Peter Castellon Peter Castellon

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer…

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer of several committees, including the IBA Capital Markets Forum, the International Securities Matters Subcommittee of the ABA Committee on the Federal Regulation of Securities and the ABA International Securities & Capital Markets Committee.

Peter has written several articles on securities law topics, including the following:

  • US Private Placements: When Rule 144A is unavailable, PLC, July, 2015.
  • SAS 72 letters: Seeking comfort, PLC, May, 2013.

  • Another way in, IFLR, March, 2012.

Before joining Proskauer, Peter was Deputy General Counsel for Citi and advised the Equity Capital Markets Division and Investment Banking Division. While at Citi, Peter worked on most of Citi’s ECM transactions in Europe, the Middle East and Africa.

Photo of Michael Choate Michael Choate

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both…

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both public and private offerings as well as private equity and joint venture transactions along with mergers and acquisitions, corporate governance issues and federal securities compliance matters.

Photo of Steven L. Lichtenfeld Steven L. Lichtenfeld

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge…

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge funds, and pension advisors regarding public offerings and private placements of real estate-related debt and equity securities, real estate-related mergers and acquisitions, real estate preferred equity investments and joint ventures, real estate-related senior and mezzanine financings and other corporate, partnership and limited liability company matters.

Steven has been widely recognized as a driving force in the real estate capital markets and finance space during his more than thirty-five year career. He has garnered several prestigious accolades in this area, including receiving a coveted ranking from Chambers USA, which has described him as “a brilliant real estate attorney with experience in many asset classes.” Chambers has also described Steven as “highly analytical and highly strategic” and “encyclopedic in terms of his knowledge” in handling a broad spectrum of public and private debt offerings, M&A, joint venture and other corporate real estate matters. Steven is also recommended for Real Estate and REITs by Legal 500 United States and is consistently recognized as a leading real estate lawyer in Best Lawyers in America and Super Lawyers.

Photo of Frank Zarb Frank Zarb

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies…

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies, hedge funds and family offices, and market intermediaries and other financial institutions on a wide range of transactional and securities regulatory compliance matters including:

  • Equity investments and dispositions in public and private companies
  • Public company registration, disclosures and preparation of periodic reports
  • Tender offers, equity lines, proxy contests, SPACs, and other highly regulated transactions
  • Regulation M, Regulation SHO, Forms 13F and 13H, insider trading and other trading issues
  • Corporate governance and stock exchange listing standards
  • Federal and state proxy requirements as well as shareholder proposals and communications
  • Regulation of financial intermediaries, including trading of public and private equity, and complex and novel trading structures
  • Advocating with the SEC on behalf of a market intermediary related to back-office processing matters.

Frank’s practice is both domestic and international, beginning with his experience in senior positions with the Securities and Exchange Commission. As a member of the staff of the SEC’s Office of International Corporate Finance, Frank advised U.S. companies seeking to do business in the EU, Asia and the Middle East, as well as companies from those regions doing business in the U.S., or otherwise seeking to comply with the U.S. securities laws.  In the Office of Chief Counsel, he focused on federal proxy rules, and supervised a team of staff members that provided guidance in the course of proxy season.

Prior to joining the Firm, Frank was deputy general counsel/chief securities counsel for Bristol Myers Squibb Co. in a new position required by the SEC. Prior to joining Bristol-Myers, Frank was a corporate partner with Morgan, Lewis & Brockius.

Social Responsibility

Frank is a Trustee of the Gerald R. Ford Presidential Foundation, and he provides significant pro bono assistance to non-profit social service institutions in the Washington, D.C. area.

Photo of Joshua M. Newville Joshua M. Newville

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and…

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and criminal investigations. In addition, Josh advises registered investment advisers and private fund managers on regulatory compliance, SEC exams, MNPI/insider trading and related risks.

Before joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry. His prior experience with the SEC provides a unique perspective to help asset managers manage risk and handle regulatory issues.

Photo of Louis Rambo Louis Rambo

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and…

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and shareholder activism. Prior to joining the Firm, Louis served as an attorney in the Division of Corporation Finance with the Securities and Exchange Commission.

Photo of Perry A. Laub Perry A. Laub

Perry Laub is an associate in the Corporate Department and a member of the Capital Markets Group.