SPAC Archives - Green Market Report

The SEC has charged cannabis investor Stable Road Capital and its SPAC Stable Road Acquisition Corp. (OTC: SRACU) which became the stock Momentus (NASDAQ: MNTS) for misleading investors. That news caused an investor lawsuit to have the green light to move forward according to a report by Law360. Stable Road is well known in cannabis circles for its financial services to many companies like MedMen (OTC: MMNFF) and Sundial (NASDAQ: SNDL). Investors are accusing the company of pivoting from its initial focus on cannabis to space and then subsequently not telling potential investors of the problems it faced getting regulatory approvals for its space plans. In addition to that, it didn’t disclose its CEO Mikhail Kokorich’s Russian origins. Kokorich is a Russian citizen residing in Switzerland. He served as Momentus’s CEO from the time he founded the company in 2017 until his resignation on January 25, 2021.

Cannabis Connection

Stable Road had established itself as a financial provider in cannabis. MedMen got $5.7 million under its senior secured term loan led by Stable Road Capital in September 2020. Then in the company’s reporting for its fiscal first quarter of 2021, it closed on $3.0 million in additional gross proceeds under its senior secured term loan with funds managed by Stable Road Capital and its affiliates. Stable Road was also mentioned in a Sundial case as a part of a group of investors that had complained that Sundial had made claims in an investor’s presentation that weren’t true. However, the judge ruled against the investors.

These investors have turned the tables on Stable Road, now claiming that the Stable Road SPAC started out claiming it was looking for a cannabis target, but then switched gears to go into space. The minutes from the case dated July 13 read, “In advance of its IPO, Stable Road Corp. filed a prospectus with the SEC on November 8, 2019. Plaintiff alleges that this prospectus represented that Stable Road Corp.’s focus would be an acquisition in the cannabis industry and that the prospectus touted the Stable Road Corp.’s executive teams’ investment and management experience, contacts, and business relationships in the cannabis industry. The prospectus did not mention the space or satellite industry.”

Space SPAC

Instead of finding a cannabis target, the group turned to space. According to the SEC, Stable Road’s SPAC’s initial efforts to identify a merger candidate focused on the cannabis
industry, and dozens of companies in that industry were evaluated, but it ultimately decided not to pursue a target in that industry given changes in the regulatory and business environment. By late June 2020, the SPAC was considering other early-stage growth companies but still had not identified a company for a merger.

The court document stated, “In the summer and fall of 2020, Momentus and Stable Road Corp. entered into a series of transactions that, if approved, would result in Momentus going public through a business combination with Stable Road Corp. On October 7, 2020, Momentus and Stable Road Corp. publicly announced their agreement to merge. The joint press release described Momentus as a “commercial space company offering in-space transportation and infrastructure services.” Despite having never completed a commercial launch carrying customer cargo, and having never recognized any revenue, the press release claimed Momentus’ customers included satellite operators, manufacturers, launch providers, defense contractors such as Lockheed Martin and government agencies such as NASA.” The investors claim that Stable Road didn’t do enough due diligence on Momentus and it seems the SEC agreed.

SEC Settlement

This week, the Securities and Exchange Commission announced charges against Stable Road Acquisition Company, its sponsor SRC-NI, its CEO Brian Kabot, the SPAC’s proposed merger target Momentus Inc., and Momentus’s founder and former CEO Mikhail Kokorich for misleading claims about Momentus’s technology and about national security risks associated with Kokorich. The SEC said its litigation is proceeding against Kokorich, against whom the SEC filed a complaint in the U.S. District Court for the District of Columbia.

“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,” said SEC Chair Gary Gensler. “Stable Road, a SPAC, and its merger target, Momentus, both misled the investing public. The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders. Today’s actions will prevent the wrongdoers from benefitting at the expense of investors and help to better align the incentives of parties to a SPAC transaction with those of investors relying on truthful information to make investment decisions.”

In the SEC announcement, it stated that Kokorich and Momentus repeatedly told investors that it had “successfully tested” its propulsion technology in space when, in fact, the company’s only in-space test had failed to achieve its primary mission objectives or demonstrate the technology’s commercial viability. “The order finds that Momentus and Kokorich also misrepresented the extent to which national security concerns involving Kokorich undermined Momentus’s ability to secure required governmental licenses essential to its operations. In addition, the order finds that Stable Road repeated Momentus’s misleading statements in public filings associated with the proposed merger and failed its due diligence obligations to investors.”

“Momentus’s former CEO is alleged to have engaged in fraud by misrepresenting the viability of the company’s technology and his status as a national security threat, inducing shareholders to approve a merger in which he stood to obtain shares worth upwards of $200 million,” said Anita B. Bandy, Associate Director of the SEC’s Division of Enforcement. “Our litigation against Kokorich demonstrates our commitment to holding individuals accountable for their statements to investors, which are of particular concern when they are aimed at improperly capitalizing on public interest in popular investment vehicles such as SPACs.”

The SEC said that it reached a settlement with the parties and that Momentus, Stable Road, and Kabot will pay civil penalties of $7 million, $1 million, and $40,000, respectively. Momentus and Stable Road has also agreed to provide PIPE (private investment in public equity) investors with the right to terminate their subscription agreements prior to the shareholder vote to approve the merger; SRC-NI has agreed to forfeit 250,000 founders’ shares it would otherwise have received upon consummation of the business combination; and Momentus has agreed to undertakings requiring enhancements to its disclosure controls, including the creation of an independent board committee and retention of an internal compliance consultant for a period of two years.

Russian Fears

The SEC stated that since 2018, multiple U.S. 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. “The Bureau of Industry and Security (“BIS”), a bureau of the U.S. Department of Commerce, oversees the issuance of export licenses, which authorize the provision of certain technologies to foreign individuals or entities. The stated mission of the BIS is to “advance U.S. national security, foreign policy, and economic objectives.”
Because Kokorich is a foreign national, he could not access parts of Momentus’s technology without an export license. In 2017, Momentus (then operating under the name “Space Apprentices Enterprise”) applied for an export license for Kokorich. In March 2018, the BIS denied the application on the ground that Kokorich was not an “acceptable recipient” of U.S. origin-items controlled for national security reasons.”

“In April 2018, in connection with Kokorich’s investment in a different space technology company, the Committee on Foreign Investment in the United States (“CFIUS”), an intergovernmental agency that includes the U.S. Departments of Commerce, Defense, and State, informed Kokorich that, as with every transaction it reviews, it assesses whether a foreign person has the capability or intention to exploit or cause harm (which CFIUS defines as the “threat”) and whether the nature of the U.S. business creates susceptibility to impairment of U.S. national security (the “vulnerability”). CFIUS further explained that a national security risk is a “function of the interaction between threat and vulnerability.” CFIUS subsequently informed Kokorich, through his counsel, that it had specific concerns about Kokorich himself, meaning that CFIUS considered Kokorich to be a “threat” that caused his affiliation with that other space technology company to be a risk to national security. As there was no acceptable mitigation option, CFIUS ordered Kokorich to divest his interest in the space technology company in June 2018.”

Kolorich was denied his application as a permanent resident of the U.S. even though he stated he was a Russian critic and wanted political asylum. It was denied due to the inconsistencies in his statements and he ended up leaving the country in January 2021. This relationship with Kolorich was keeping Momentus from receiving governmental approvals, so he left the company, but that didn’t solve all of its problems.

The SEC did note that Momentus and Kolorich didn’t tell Stable Road about the security concerns, but it stressed that it was up to Stable Road to do its due diligence.