Troubles seem to be multiplying for space company Momentus, as well as for deals overall involving special purpose acquisition companies (SPACs). On June 16, a company investor sued Momentus in Delaware, and in 2021 the U.S. Securities and Exchange Commission (SEC) filed suit against company founder and former Chief Executive Officer Mikhail Kokorich. The latest suit alleges fraud in the 2021 de-SPAC transaction between Stable Road Acquisition Corp. and the space company.
Formed for the sole purpose of raising money through an initial public offering (IPO), a SPAC is designed to acquire a private company. Investors participate in SPACs based on the reputations of the SPAC organizers. However, SPAC investors don’t know what private company the SPAC plans to acquire. That’s why a SPAC is also called a “blank-check company” and why the eventual merger with a private company, or de-SPAC transaction, is called a “blank-check merger.”
Mounting numbers of Delaware suits are targeting the structural features of SPACs, especially “founder shares.” Such shares cost insiders fractions of a penny but often multiply in value by a factor of thousands if a merger is completed. So far, one Delaware judge has ruled that such “mismatched incentives” of SPAC transactions don’t in and of themselves breach any fiduciary duty.
According to the June 16 complaint against Momentus, Stable Road’s board was determined to get “any deal done at all, even if the deal inflicted severe harm on the unaffiliated stockholders,” who were “robbed of their redemption rights” and “tricked into investing in an overvalued company.” The Delaware suit seeks various corporate documents, a tactic that often indicates an attempt to build a claim of fiduciary breach. The complaint alleges insiders at both Momentus and Stable Road hoodwinked investors into approving the de-SPAC transaction by making false promises about Momentus’s propulsion technology and hiding insider conflicts of interest.
The Momentus website says the company will “offer in-space infrastructure services by building transfer and service vehicles that will carry satellites and hosted payloads between orbits in space using an innovative water-based microwave electrothermal (MET) propulsion system.” One writer called it a “ride sharing service for satellites.”
But the MET propulsion system has failed to materialize, instead experiencing various unsuccessful test runs. Momentus didn’t respond to a request for comment following the suit filing.