Action against an investment firm funding NuScale could jeopardize its quest to commercialize a 45 MW light water reactor
Guest blog post by Tamar Cerafici
One month after charging Don Gillispie, CEO at Alternative Energy Holding Inc., with fraud, the Securities and Exchange Commission (SEC) issued another complaint against a major investor in SMR technology. This time the SEC’s focus is on NuScale’s main funding source, Michael Kenwood Group.
On Jan 14 the SEC filed a complaint against Michael Kenwood Capital Management, LLC (MKCM). According to court papers MKCM provides the bankroll that’s keeping NuScale in business. MKCM has done this through a series of loans to the company, to the tune of about $23 million. In brief, the SEC says those loans violated SEC regulations. (see reference links below)
The SEC freezes money needed fund to Nuscale operations
The SEC also filed a Motion for a Temporary Restraining Order (TRO). The TRO will operated to essentially freeze any outgoing investments or funding of MKCM projects. With MKCM’s assets frozen, NuScale is left without a critical tranche (according to court documents, about $5 million).
According to the Portland Business Journal, SEC's action has suddenly turned a promising and seemingly well-capitalized Oregon energy startup into one in immediate need of new financing.
“This was a curve ball to us,” said Bruce Landrey, a spokesman for the Corvallis-based company, which is developing modular reactors for nuclear power plants.
NuScale said in a statement (PDF file below) it is reviewing the impact of the restraining order on its 90 full-time employees.
According to the TRO supporting documentation, MKCM “invested” in companies using funding from private equity accounts. This funding, according the the SEC, could only be used for short term investments. Contrary to the terms of the private offering, MKCM allegedly used the funds to make the loans to NuScale and other energy companies.
A cautionary tale
In freezing the MKCM funds, the SEC has sent another shiver down the spine of nuclear entrepreneurs, SMR investors, and vendors, many of whom operate on a knife’s edge between bankruptcy and liquidity. After two major investigations announced in the same number of months, the industry should be looking over its collective shoulder.
The field of SMR contenders is populated with low-hanging fruit. Companies seek and obtain venture capital by talking big and moving aggressively. The SEC activities will certainly dampen the enthusiasm that’s marked most SMR propaganda. While it’s fun to read, developers seem to have gotten caught up in their ad copy. The industry can’t forget that even private investments are subject to SEC regulations, and that it’s possible for companies to get entangled in those regulations, too.
The demise of a viable SMR technology?
It appears that the rumors of NuScale’s death may be greatly exaggerated, but the company is certainly on life support.
NuScale was suspending operations until the fracas can be sorted out. A contract on the NRC design certification will cease, and it’s likely operations will be severely scaled down. The schedule for DC will certainly be extended to beyond its current goal of 2014.
The proceeding against MKCM is a complicated securities action. The TRO is a creature of the courts, and can be tweaked by the court in Connecticut as necessary. It’s entirely possible that the NuScale operating funds could be released, and business could resume within the next few months.
It could be a while to sort things out
AEHI was also pursuing small modular reactor technologies. In June 2010 its signed an MOU with Hyperion Power of Albuquerque, NM, which is developing a 25 MW fast reactor. The MOU was touted by the two firms as the beginning of a joint venture to license, build and market Hyperion's refrigerator-sized modular nuclear reactors on a world-wide basis. Hyperion was not named in the SEC's complaint against AEHI.
Another development is that in AEHI's case, the SEC action set off a blizzard of separate stockholder suits against the firm. It is possible that the SEC's action against MKCM could result in investor lawsuits that might tie up funds owed to NuScale. It isn't known whether NuScale has other investors it can approach to keep going.
Tamar Cerafici (right) is an attorney based on Frederick, MD, specializing in environmental and nuclear energy law. website
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