A special purpose acquisition corporation ("SPAC"), its sponsor, CEO and proposed merger target settled SEC charges for misrepresentations and due diligence failures that led to investors purchasing stock in the merged company. In a related Complaint filed in the U.S. District Court for the District of Columbia, the SEC charged the merger target's CEO with misrepresentations of material facts.
According to the SEC Order, the merger target - a privately held space company - and the SPAC told investors repeatedly that the merger target had "successfully tested" its key technology when, in fact, the test (i) had failed to meet the merger target's own pre-launch criteria and (ii) was conducted on a noncommercial prototype. Moreover, the SPAC's public filings incorporated the misinformation and were signed by the SPAC CEO. As a result:
- the merger target was charged with violating SEA Section 10(b) ("Regulation of the use of manipulative and deceptive devices"), SEA Rule 10b-5 ("Employment of manipulative and deceptive devices"), and SA Section 17(a) ("Fraudulent interstate transactions");
- the SPAC was charged with violating SA Sections 17(a)(2) and 17(a)(3), SEA Section 14(a) ("Proxies"), SEA Section 13(a) ("Periodical and other reports) and rules thereunder; and
- the sponsor and SPAC CEO caused the SPAC's violations of SA Section 17(a)(3), and the CEO was found in violation of SEA Section 14(a) and SEA Rule 14a-9 ("False or misleading statements") thereunder.
To settle the charges, the merger target, the SPAC, the sponsor and SPAC CEO agreed to cease and desist from future violations. Further:
- the merger target, SPAC and CEO agreed to pay civil money penalties in the amounts of, respectively, $7 million, $1 million and $40,000;
- the merger target agreed to certain compliance undertakings that include a permanent committee on its Board of Directors to oversee the implementation of the terms of the Order and the retention of an Independent Compliance Consultant;
- the SPAC agreed to offer investors the right to terminate their subscription agreements during a 24-hour period following such offer; and
- the sponsor agreed to forgo the founders' shares that it would have received upon shareholder approval of the business combination.
In the Complaint filed in the U.S. District Court for the District of Columbia, the SEC charged the merger target's CEO with disseminating misrepresentations of material facts regarding (i) the merger target's technology and (ii) the extent to which the CEO's national security risks affected the merger target's business timeline and, therefore, revenue. The SEC charged the merger target's CEO for violating SEA Section 10(b), SEA Rule 10b-5, and SA Section 17(a), seeking injunctive relief, disgorgement, civil penalties and an officer-and-director bar.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
