A recent boom in the issuance of SPACs — shell companies that raise capital from investors to complete a future acquisition — has raised concerns about investor protection issues with blank-cheque companies. Now, U.S. securities regulators have charged the various players in a SPAC deal with alleged disclosure violations.

The U.S. Securities and Exchange Commission (SEC) announced it has charged special purpose acquisition corporation (SPAC) Stable Road Acquisition Co., as well as its sponsor and CEO, Brian Kabot, with alleged securities violations, along with Stable Road’s proposed acquisition target, Momentus Inc., and Momentus founder and former CEO Mikhail Kokorich.

Kokorich is contesting the allegations, but the other targets of the SEC’s enforcement action are settling the allegations.

According to the SEC’s order, Momentus, an “early-stage space transportation company,” and Kokorich “repeatedly told investors that it had ‘successfully tested’ its propulsion technology in space when, in fact, the company’s only in-space test had failed to achieve its primary mission objectives or demonstrate the technology’s commercial viability.”

The regulator also found that, “Stable Road repeated Momentus’s misleading statements in public filings associated with the proposed merger and failed its due diligence obligations to investors.”

Without admitting or denying the SEC’s charges, the settling respondents agreed to pay a combined US$8 million in penalties.

They also agreed to added investor protections, such as allowing investors to terminate their subscription agreements prior to a planned shareholder vote on the proposed acquisition. The deal’s sponsor gave up its shares in the transaction, and Momentus agreed to enhance its disclosure controls.

“This case illustrates risks inherent to SPAC transactions, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors,” said SEC chair Gary Gensler in a release.

“Stable Road, a SPAC, and its merger target, Momentus, both misled the investing public. The fact that Momentus lied to Stable Road does not absolve Stable Road of its failure to undertake adequate due diligence to protect shareholders,” Gensler said.

Melissa Hodgman, acting director of the SEC’s enforcement division, said the settlement “will deter future misconduct in the SPAC market without inhibiting capital formation, while also allowing for the distribution of monetary relief to harmed investors.”

The SEC’s complaint against Kokorich alleges he violated securities laws and aided and abetted Momentus’s violations. The allegations have not been proven. The SEC is seeking permanent injunctions, penalties, disgorgement and an officer-and-director ban against Kokorich.