WASHINGTON—A space-transportation company trying to go public didn’t tell potential investors that its satellite-hauling technology failed, that it lost contact with a satellite in space and that its Russian founder had been deemed a national-security risk by the U.S. government, the Securities and Exchange Commission said.

Had the company, Momentus Inc., filed for a traditional initial public offering, the bankers working on the deal could be liable for any misleading statements to investors. But it didn’t. It is attempting to go public by merging with a special-purpose acquisition company—a route that doesn’t require bankers to do full due diligence on the business breaking into public markets.

While SPACs are hot, it is a route the SEC is trying to curb. The commission accused Momentus and its founder of fraud and its SPAC partner of negligence for not ferreting out the problems and disclosing them in regulatory filings and investor materials.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ The Wall Street Journal Interactive Edition

“Those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors,” SEC Chairman Gary Gensler warned in announcing an enforcement action earlier this month that included a settlement order.

Momentus agreed to pay $7 million and the SPAC, Stable Road Acquisition Corp. , agreed to pay $1 million to settle the SEC probe, the agency said. The resolution didn’t require the companies to admit wrongdoing.

The SEC also sued the founder of Momentus, the Russian entrepreneur Mikhail Kokorich, in federal court. Mr. Kokorich denies the SEC’s allegations that he misled investors and his SPAC partner, and “believes his position will be vindicated,” said his attorney, Thomas Gorman.

Momentus said it is “pleased to be closing this chapter” and looks forward to going public and providing value to shareholders. An attorney for Stable Road didn’t respond to requests for comment. The company, in a recent regulatory filing, said it conducted “extensive due diligence” on Momentus’s finances, technology and intellectual property.

In a traditional IPO, bankers, lawyers and accountants exhaustively research the listing company, examining records to verify statements made to investors.

“With a traditional IPO, the investment bank is involved, and it has to do thorough due diligence,” said Georges Ugeux, a lecturer at Columbia Law School and a former executive at the New York Stock Exchange. SPACs are supposed to conduct due diligence in mergers, he said, adding, “It’s not going to be as thorough.”

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SPACs raise capital, list on exchanges and then find merger targets. A SPAC typically has two years to complete an acquisition, or it must return the cash to shareholders, creating an incentive to get a deal done. Stable Road has until August to complete the merger with Momentus.

The investment bank Evercore Inc. advised Momentus on its financial projections and negotiations with Stable Road. Evercore’s role was akin to the job a bank plays in a merger, providing financial advice to a company that is being acquired, Mr. Ugeux said. An Evercore spokesman declined to comment.

Stable Road’s founders initially considered cannabis companies when they began hunting for a startup to take public. They launched talks with Momentus, initially valued at $1.8 billion, in July 2020, according to regulatory filings.

Momentus, in a fall investment presentation, said its customers have included the National Aeronautics and Space Administration and government contractors such as Lockheed Martin Corp. It plans to have SpaceX rockets carry Momentus’s smaller transport vehicles into space, according to the presentation and regulatory filings. Lockheed is no longer a customer, according to Momentus.

Its propulsion technology to carry satellites from rockets and place them into orbit was unproven and a test in 2019 wasn’t successful under the company’s criteria, with the company losing contact with a demonstration satellite, which remains in space, the SEC said. A Russian Soyuz rocket carried the Momentus thruster into space, according to Momentus. The company told investors after the demonstration that it had been successful, the SEC said.

Stable Road didn’t start its review of Momentus until a month before the merger was announced in October 2020, and a consultant hired by Stable Road to review Momentus’s technology didn’t evaluate the result of the test mission, the SEC said.

Mr. Kokorich, who founded the space company in 2017, also misled investors and Stable Road about his national-security issues, the SEC alleged in its lawsuit.

A unit of the Commerce Department denied Momentus’s application in March 2018 for an export-license for Mr. Kokorich to access the company’s propulsion technology after consulting the Defense and State departments because he “was not an ‘acceptable recipient’ of the technology ‘for national security reasons,’” the SEC said. The SEC filing didn’t elaborate on the Commerce Department’s decision.

A month later the Committee on Foreign Investment in the U.S., a multiagency panel that screens deals for national-security risks, flagged Mr. Kokorich’s investment in a different space company and later suggested that he divest his stake, citing the sophistication of the company’s technology and unspecified concerns about him and other investors, the lawsuit said.

U.S. Citizenship and Immigration Services soon revoked Mr. Kokorich’s work visa and denied his request for permanent resident status, according to the SEC. He later applied for political asylum, which was also denied. He now lives in Switzerland, according to the SEC.

Mr. Kokorich resigned as chief executive in January, a few days after the Defense Department told Momentus that his ownership and control of the company posed a national-security risk.

Momentus and Stable Road are still seeking shareholder approval next month for their merger. Momentus’s value has been reduced to $566 million, according to securities filings. Private investors pulled $118 million from the deal after the SEC enforcement action was announced, but the company has raised funds from new investors, regulatory filings show.

Write to Dave Michaels at dave.michaels@wsj.com