|Footnotes for this article are available at the end of this page.
On July 13, 2021, the Securities and Exchange Commission (“SEC”) brought a settled administrative proceeding alleging fraud against a special purpose acquisition company (“SPAC”) and its targeted acquisition and the individuals involved.1 The SPAC, named Stable Road Acquisition Company (“SRAC”), its targeted acquisition, Momentus, Inc. and SRC-NI Holdings, LLC, and SRAC’s chief executive officer (“CEO”), Brian Kabot, settled the SEC’s administrative claims. That same day, the SEC filed an unsettled complaint in the U.S. District Court of the District of Columbia (“complaint”) alleging fraud claims against Momentus’ founder and former CEO, Mikhail Kokorich.2 The following day, Momentus’ CEO, Kabot, left and the company named John Rood, a former Lockheed Martin and Raytheon executive, as its new CEO, effective August 1, 2021.3
The SPAC at issue became publicly traded on October 29, 2019, after it had filed its second amended registration statement on Form S-1. By November 7, 2019, it announced an IPO for $150 million,4 and by the following summer, it had begun courting its reverse-merger5 target, Momentus. On October 7, 2020, almost a year after becoming a public company, SRAC announced a merger agreement with Momentus (“Merger Agreement”), a self-characterized space-infrastructure company.6 Momentus had developed a water-propulsion thruster designed to increase the velocity of small, space-borne satellites. On the same day, concurrent PIPE (private investment in public equity) investors agreed to buy 17.5 million shares of the merged company’s common stock at $10.00 per share for $175 million to be affected if and after merger approval.
The SEC settlement with SRAC offered the PIPE investors an opportunity to withdraw from their subscription agreements, and investors representing $118 million of the $175 million withdrew. This diminishment was offset by new PIPE investors buying $47.75 million worth of shares.7
SEC’s Two Fraud Theories
This matter is noteworthy for several reasons. First, the fraud claims against Kokorich, a Russian national, concern his “status” as a “national security risk,” a “status” based on a couple of non-specific administrative decisions, and statements Kokorich made during merger negotiations with SRAC, a public company that had the resources and the obligation to perform due diligence. According to the SEC, Kokorich “has faced repeated adverse determinations from U.S. government agencies for national security reasons,” and he failed to disclose that some U.S. government agencies had made “multiple adverse determinations” against [him] for purported “national security reasons,” which “materially impaired Momentus’s ability to participate in U.S.-based rocket launches. His failure to inform the SRAC, PIPE investors, and retail investors of these administrative conclusions so as “to secure and promote” the Merger Agreement constituted a fraudulent omission of material information.8
The SEC identified the unspecified “national security reasons” as consisting of the U.S. Department of Commerce’s 2018 summary rejection of Kokorich’s 2017 application for an export control license.9 The Department “informed” Kokorich that he “was not an ‘acceptable recipient’ of the technology for [unspecified] ‘national security reasons.’” In 2018, the Committee on Foreign Investment in the United States (“CFIUS”) informed Kokorich that it considered his investment in his earlier space technology company to pose an unspecified “risk to the national security of the United States.” Later that year, CFIUS re-asserted the requirement that Kokorich, as a foreign national, divests his ownership in and control of that company.10 According to the SEC, Kokorich apparently should have disclosed his U.S. immigration status as well.
Second, the SEC asserts that Kokorich misrepresented the outcome of Momentus’ test flight, the El Camino Real mission (“Mission”), during merger negotiations with the SPAC’s CEO, Brian Kabot, and did not tell Kabot of problems in the Mission, and “did not explain [to Kabot] that the [Mission] was not designed to show any demonstrable impulse or delta-v from the thruster, or to demonstrate the thruster’s reliability.”11 Although these conversations occurred during discussions with anticipated due diligence, the SEC claims that Kokorich knew or should have known that the SPAC’s CEO “would rely on [Kokorich’s] statements in determining to proceed with the merger and PIPE-fund raising, and that [Kokorich’s] false and misleading statements would be repeated to investors while promoting the merger.”12 As to Kabot, the SEC’s administrative order states that “[a]lthough Kokorich and Momentus never shared with SRAC and Kabot material internal analyses about the mission’s [alleged] failure, SRAC nevertheless acted unreasonably in adopting and repeating Momentus’s claim that it had successfully tested its technology in space when it had not conducted any specific due diligence to evaluate and verify the accuracy of that material assertion.”13 The SEC claimed simply that Kabot had caused Stable Road’s violations of Section 17(a)(3) of the Securities Act,14 and violated Section 14(a)15 of the Exchange Act and Rule 14a-916 thereunder.17
The SEC as Enforcer of Reverse-Merger Negotiations
The SEC apparently investigated the merger negotiations between the SPAC and the target, Momentus. Allegedly false statements made during such negotiations can become the basis for an SEC investigation and may result in fraud claims and legal action despite a public company’s ability and obligation to perform due diligence on a target company. The question arises whether the SEC is interested in investigating (1) any negotiations involving an asset sale, stock sale, or merger between any two corporations or (2) primarily negotiations between a SPAC and its target. We suspect the latter. The SEC seems to be interested in examining SPAC acquisitions in particular because it is only when a SPAC finds its merger target that the SPAC IPO genuinely closes. This is a result of the SEC having allowed, by permitting SPACs to register securities and commence public offerings prior to having selected a target acquisition, individuals to put the cart—the IPO—before the horse—the operating business.
The SEC as the Enabler of SPACs
This matter raises the larger question of why the SEC allows SPACs to exist at all, particularly if the public has “to pay” insofar as it loses money to frauds or to the SEC as it investigates negotiations between SPACs and their target companies.
The “investor protection” objective of the federal securities laws is purportedly not merit-based, which means that the SEC generally does not examine the desirability of an enterprise’s business model when the enterprise seeks capital from the public. Instead, investor protection at the national level focuses on the scope and truthfulness of a company’s disclosures; the SEC’s Division of Corporation Finance (“Corp Fin”) requires a company to provide written descriptive, historical, and financial statements needed for investors to make informed investment decisions, concerning an initial public offering (“IPO”) and follow-on offerings, and the SEC’s Division of Enforcement uses those statements, when called upon, to determine whether the “reality” they report was—indeed—real.
The blank check company is the extreme of the non-merit principle regulation principle. This type of company sells securities in an IPO, referred to as a blank check offering. In a blank check offering, the written disclosures are simple: the company seeks capital so it can buy or merge with a, (privately held) but as-yet-unknown, operating company.18 The blank check company has no business model, and its only identity is its name, a management team, and a bank account. A recognizable management team may be a selling point, and the offering effectively ensures that management of the blank check company, due diligence fees, and other costs are funded and paid in the process of seeking out a business target.
The target, however, might not succeed in an IPO despite having operations, and this creates a paradox: How can a company with no operations succeed in an IPO when a company with operations has not? The paradox may not be authentic because the operating company may not be truly operating—or may be limping along at a loss. The blank check company brings no other resources to the table than its managers (who may or may not have operating experience in the relevant industry) and its publicly-raised funds. If the target company was not profitable, to begin with (one possible reason it has not already initiated an IPO), then the blank check acquisition simply replaces creditors (who will be happy at this point to have the debt paid off) with equity holders. This is the potential hazard of the blank check offering, which has led to some instances of stock fraud.
Congress addressed this and other problems with the Penny Stock Reform Act of 1990 (“Act”). A portion of the Act,19 under which the SEC created Rule 419 of the Securities Act of 1933 (“Securities Act”),20 subjects most of the blank check company’s IPO proceeds to an escrow account and requires filing follow-on amendments to its registration statement.21 In effect, the IPO is considered not to have closed fully until the blank check company identifies a likely acquisition.22
Two years after the Act, “a small team of lawyers and underwriters” created a type of blank check company that has “sufficient investor protection in place to gain the approval of the SEC”23—the special purpose acquisition company, known by its acronym, SPAC. The SPAC is a more respectable and reputable blank check company.
Although SPACs may reduce the fraud possibilities of the pre-SPAC blank check companies, the model of obtaining public funds and then looking for a place to put those funds to work is of questionable value to the investing public and an area of SEC scrutiny. As the SRAC and Momentus matter might suggest, SPACs may not be as effective at, or interested in, performing extensive due diligence when undertaking reverse-merger negotiations.
 Order Instituting Cease-and-Desist Proceedings, pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities and Exchange Act of 1934, making findings, and imposing a cease-and-desist-order, Momentus, Inc., SEC Admin. Proc. File No. 3-20393 (July 13, 2021) (“Momentus Order”), https://www.sec.gov/litigation/admin/2021/33-10955.pdf.
 Complaint, SEC v. Kokorich, Case No. 1:21-CV-1869 (D.D.C. July 13, 2021) (“Kokorich Complaint”), https://www.sec.gov/litigation/complaints/2021/comp-pr2021-124.pdf.
 Jeff Foust, “Investors drop out of Momentus SPAC deal,” Space News, July 19, 2021 (“Foust”), https://spacenews.com/investors-drop-out-of-momentus-spac-deal/.
 “Stable Road Acquisition Corp. Announces Pricing of $150,000,000 Initial Public Offering,” Nov. 7, 2019, at https://www.globenewswire.com/news-release/2019/11/07/1943619/0/en/Stable-Road-Acquisition-Corp-Announces-Pricing-of-150-000-000-Initial-Public-Offering.html.
 A reverse merger is a merger between a non-operating public corporation, such as a SPAC, and a private operating company in which the merged corporation assumes the identity of the latter. See, e.g., Time Lemke, “What are Reverse Mergers,” U.S. & World Economies, Jan. 22, 2021, at https://www.thebalance.com/what-are-reverse-mergers-and-how-do-you-spot-one-4165740
 Foust, supra note 3.
 Kokorich Complaint, supra note 2, ¶ 2.
 Id. ¶ 35.
 Id. ¶ 36.
 Id. ¶ 49.
 Id. ¶ 50.
 Momentus Order, supra note 1, ¶ 41. The SEC does not hesitate to apply its own views as to the adequacy of the aerospace engineering aspects of the Mission.
 15 U.S.C. § 77q(a)(3).
 15 U.S.C. § 78n(a).
 17 C.F.R. § 240.14a-9.
 Momentus Order, supra note 1, ¶ 63.
 15 U.S.C. § 77g(b)(3) defines a “blank check company” as a development stage company that issues penny stock, as defined under 15 U.S.C. 78c(a)(51), either (A) has “no specific business plan or purpose,” or (B) indicates its business plan is to merge with an unidentified company or companies.”
 15 U.S.C. § 77g(b)(1) requires the SEC to prescribe special rules concerning registration statements for blank check offerings.15 U.S.C. 77g(b)(1), https://www.law.cornell.edu/uscode/text/15/77g.
 17 C.F.R. § 230.419, https://www.law.cornell.edu/cfr/text/17/230.419.
 A history of the blank check company and its post-regulatory doppelganger, the SPAC, is presented in Derek K. Heyman, From Blank check to SPAC: The Regulator’s Response to the Market and the Market’s Response to the Regulation, 2:1 Entrepreneurial Bus. L. J. 531 (2007).
 See, id. at 538.
 Id. at 532.