Stable Road Acquisition (SRAC) stock fell almost 5 percent on Jul. 13 and was down in premarket trading on Jul. 14. The SEC has accused the company of misleading investors and imposed a fine. Should you buy the dip in SRAC stock before the Momentus merger?
Space transportation companies were in the limelight after Richard Branson's successful space flight. The flight boosted Virgin Galactic (SPCE) stock but that was dampened by the company's announcement of a stock sale.
The SRAC-Momentus deal's valuation was revised
The SRAC-Momentus deal was revised in Jun. 2021, with its valuation lowered from $1.2 billion to $700 million. While the lower valuation was positive for SRAC investors, the company also lowered its EBITDA forecasts—its 2025 EBITDA forecast was cut by over 55 percent, and its 2027 forecast was cut by over 45 percent. Its valuation cut reflected the new forecasts.
SRAC stock rose after the valuation cut. It's worth noting that SPACs tend to provide rosy forecasts.
SEC chairman Gary Gensler cracks down on SRAC
The SEC has been tightening regulations on blank-check companies, revising warrant accounting standards. New chairman Gary Gensler has also cracked down on SRAC for making misleading claims.
Gensler accused Momentus of misleading investors with claims that it “successfully tested” its propulsion technology in space, whereas its space test had failed. He also accused the company of misrepresenting national security risks associated with its former CEO, Mikhail Kokorich.
As a result, the SEC has fined Momentus $7 million, SRAC $1 million, and SRAC CEO Brian Kabot $40,000. Furthermore, 250,000 founder shares are to be forfeited, and PIPE investors have been granted the option to withdraw from the deal.
Why the SEC fine is a watershed moment
SPACs have been capitalizing on regulatory arbitrage for far too long. The SEC fine could change things for the better by improving screening by sponsors—an issue that has been weighing on SPAC stocks this year. After Hindenburg Research accused Chamath Palihapitiya of failing to do due diligence on the Clover Health merger, CLOV stock tumbled below its IPO price of $10. Despite Reddit traders pumping it back up to a high of $28.85, it's now returned to below $10.
What to do with SRAC stock now
With SRAC stock hovering around $10, investors might want to cash out of the stock after the allegations. However, investors with a higher risk tolerance might find SRAC stock attractive now after the crash—compared with Astra's and Rocket Lab's valuation, SRAC's valuation looks attractive.
The next few days will be crucial for the SPAC. If PIPE investors opt to withdraw from the deal, sentiment could be impacted, and if SRAC falls below $10, the merger itself might be at risk. And if the merger sails through, Momentus will need to deliver on its execution plans.