This weekend, Richard Branson became the first
man to walk on the moon. Wait, sorry he became one of the people to
fly on a plane that went close to space, but not actually into space. Well, I guess it went higher than a lot of
planes go, and I suppose it is impressive. It would be more impressive if it was 1950,
but still… well done Richard. At least he has moved on from those hot air
balloons he was messing around with a few years ago. I’m sure he will go down in history for
his various aviation reenactments… Anyhow, to celebrate this monumental achievement,
the securities and exchange commission announced on Tuesday that they are charging a space
transportation company and a bunch of people associated with it for making misleading claims
about their technology. The company – a SPAC - is called Stable
Road Acquisition Company and the charges relate to its proposed merger with Momentus Incorporated. It is a bit of an unusual case, and I believe
it is the first securities-fraud case from the current crop of SPAC’s. No doubt there will be more. The SEC has been clear that they are not happy
with what has been going on with SPACs, and that they will go after the individuals involved. There are other SPACs where the principals
actually admitted to making false statements to investors, and it might be a good bet that
those will be of interest to the SEC too. In truth I think the SEC started out with
this one, as they wanted a space theme to celebrate Branson’s historic achievement. So first what is Stable Road Acquisition Corp,
what is momentous and what are they accused of? Well Stable Road was a SPAC that raised $172.5
million dollars back in November 2019 in order to buy weed. Or as they worded it in their prospectus “to
focus our search on companies in the cannabis industry which are compliant with all applicable
laws and regulations.” That’s basically the same
Now, by June of last year, they decided that weed was out and space was in. (Is this story from the 1960’s??) No… OK. Now as I explained in an earlier video about
SPACS and why investors should be careful with them. SPACS have 18 months to do a deal and charge
huge fees, or they have to give all of the money back and lose the few thousand dollars
that they invested themselves. So the Stable Road Boyz, found a nice Russian
man named Mikhail who said he makes plasma space rockets – or at least that he tries
to. Mikhail used words like rideshare, last mile
and plasma and explained that another company would put the satellites in space (not Richard
Branson – his space ship only goes close to space) but someone else – maybe even
Elon Musk, but anyhow the satelites would be in space, and Mickael and his company Momentus
would move the satellites into position. Delivering them the last mile… riseshare…
plasma… so on… Anyhow, very little of this space nonsense
matters. We are running out of time with this SPAC. We have 18 months to do a deal remember. So, what we need to know is that Mikhail had
a good story about plasma space rockets, and Stable Road had $172.5 million of weed money
and the clock was ticking. Stable road hired a space technology consulting
firm (yeah, I guess that’s a thing?) and they agreed that the technology was good and
a merger deal was then eh. Shrewdly negotiated. On top of the SPAC, the team pitched other
investors on a PIPE (private investment in public equity) to buy another $175 million
of Momentus stock alongside the SPAC merger. All of this was all announced last October. So I’m sure you are thinking that everything
worked out, right? What could go wrong?? Well the SEC’s lawsuit claims that Mickael
was lying to the good people of Stable Road, and they passed those lies on to investors. So far all of the accused other than Mikhail
have settled, agreeing to pay a total of $8 million to the SEC, forfeit some founders’
shares in the SPAC, and let the PIPE investors get their money back if they want to. What did Mikhail lie about I hear you ask? Well he did actually have a plasma space rocket
– it was named “the El Camino – after a Ute from the 1960’s”. The only problem is that it didn’t work. Plasma space rockets are not like electric
trucks, you can’t just push them down a hill. The SEC complaint describes what went wrong
in great detail, there are space words in the complaint like “hot firings”, “microwave
power” “thruster” and “burns”. The takeaway is that it didn’t work, and
they lost it – in space... Mikhail then went and lied to an esteemed
Space publication called “Space News”. He said “Water plasma propulsion is now
technologically mature enough to be baselined for operational in-space transportation missions.” He said all of this in a Russian accent (OK,
I don’t know if he has a Russian accent, but I feel giving him one improves the story). As it leads us to his other lies. He is additionally in trouble with the SEC
as he lied about his immigration status and his national-security status. Mikhail was in the U.S. on a work visa, and
in 2018 his visa` was revoked. He applied for asylum and that application
was denied. As a foreign national, he could not access
parts of Momentus’s technology without an export license. (Listen, I’m as surprised as you are that
you need an export license to access the technology in some sort of broken rocket, that I kinda
get the impression has a microwave in it. But rules are rules) He was hardly going to
sell this technology to Russia. Russia has rockets that work, water plasma
last mile ride sharing rockets can only be sold in silicon valley – or to stoners. Anyhow, in January of this year, after the
merger was signed and announced, Mikhail stepped down as CEO of Momentus and he moved to Switzerland. At this point he is just trying to look like
a Bond villain. So, this case might be a bit of a preview
of how weird SEC SPAC enforcement is likely to be going forward. There is a risk that my YouTube channel will
degrade into me reading just reading SEC complaints out word-for-word with a confused look on
my face. Don’t forget to subscribe if you want to
watch that… So just to be clear, this SPAC merger has
not actually closed yet. While Mikhail allegedly lied about plasma
rockets and microwaves to sell his company, the SPAC’s shareholders still get to vote
on the deal. If they don’t like what they are getting
or what they read in the SEC order, they can just vote against the deal, or ask for their
money back. SRAC closed at $10.66 today, so if you got
in at the IPO price of $10, you have made money so far. The only problem is that the SPAC traded as
high as $27 back in February and so people who bought at that price have lost a lot of
money. They have been harmed by the lies they were
told and by the quality of due diligence done by the SPAC sponsors. The merger agreement was amended two weeks
ago essentially cutting the price of Momentus in half to account for the problems that have
since been disclosed. So, if the SPAC investors stay in, they get
twice as much equity, but in a company with questionable technology. One thing we are learning from this case is
that if you are a SPAC sponsor, and you are lied to and you then pass those lies on to
your investors, the SEC can go after you. Even if you hired a space technology consulting
firm. One final thing. If you like this content, but want to listen
on your commute, or at the gym, an audio version is available, you can find it on apple podcasts,
spotify, or on whatever podcast platform you usually use. That’s all for now, see you next week.
