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The Big SPAC Crackdown

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02.09.2021

In the wild world of SPACs, the Stable Road Acquisition Corp. stands out for more than just its now-ironic name. The company, which last October inked an agreement to merge with a space transportation start-up called Momentus, might go down in financial history as a case study in how America’s multiyear SPAC boom finally came to an end.

At a basic level, a SPAC is a specially created shell company designed to do a bare-bones initial public offering and then merge with a real-world company looking to go public, without the arduous process that an IPO generally entails. In this instance, Stable Road was the publicly traded shell company and its arranged marriage with Momentus, a private start-up boasting a technology it claimed could move satellites into orbit after launch, planned to set a valuation of $1.2 billion for the combined entity. But the road for Momentus after the announcement of the merger has been anything but stable: When the deal was finally consummated last month after a settlement with the Securities and Exchange Commission, the company was only worth $700 million.

So-called space deals like Momentus became popular in SPAC land after Silicon Valley entrepreneur Chamath Palihapitiya’s initial SPAC (he now has launched several) teamed up with Richard Branson’s Virgin Galactic in late 2019, opening the floodgates on what has become one of the most remarkable financial frenzies in recent memory. In the last 20 months, investors handed over more than $200 billion to publicly traded SPAC shell companies, which simply raise money to go out and find companies to buy. Though high-risk space start-ups have gotten a lot of the headlines, the hundreds of SPAC deals done over the past two years have covered sectors from insurance to electric vehicles to cryptocurrencies.

The fate of Stable Road’s Momentus deal provides a hint into why we might be seeing fewer SPACs next year and beyond: It was an early victim of what is shaping up to be a crackdown by both regulators and lawmakers. Under the Biden administration and a Democratic Congress, authorities seem keen to close the loopholes that have allowed these complicated financial deals — which often provide huge windfalls to their sponsors and early hedge-fund investors while burning individual investors who get in late to the game — to flourish.

In announcing the settlement with Stable Road, Gary Gensler, the SEC’s new chairman, wasn’t shy about stating his perspective: “This case illustrates risks inherent to SPAC transactions,” he said, adding that the SEC’s actions “will prevent the wrongdoers from benefitting at the expense of investors.” As part of the deal, Stable Road CEO Brian Kabot and Momentus paid more than $8 million to settle charges with the agency, regarding “misleading claims about Momentus’s technology” and the failure to disclose foreign ownership and national security risks connected to its founder and former CEO, Mikhail Kokorich, a Russian citizen living in Switzerland whom the SEC is pursuing separately.

One of President Biden’s earliest appointments, Gensler earned a reputation for aggressiveness during the Obama administration, when he led a regulatory effort to rein in the swaps market that almost took down the entire financial system in 2008. During that era, the SEC was derided for being asleep at the wheel ahead of the market crash. By all accounts, Gensler is determined not to let it happen again under his watch and has made stemming the abuses of SPACs a high priority, both on the enforcement and policy side.

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