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.