Publicly-traded shell companies, known as special purpose acquisition companies (SPACs) in the U.S., face the same compliance obligations as traditional public companies, U.S. regulators insist.

The U.S. Securities and Exchange Commission (SEC) settled allegations — of internal control, reporting, and record keeping violations — with African Gold Acquisition Corp. after finding that the SPAC’s failings enabled its former chief financial officer to embezzle approximately US$1.2 million from the company.

Earlier this year, the executive, Cooper Morgenthau, admitted to misappropriating more than US$5 million from two SPACs, including African Gold, which he used to trade various “meme stocks” and crypto.

Today, without admitting or denying the SEC’s findings, the company agreed to a cease and desist order, and to pay a penalty of over US$100,000.

According to the SEC’s order, the company’s only liquid asset was the money in its operating bank account, so “potential fraud by management posed one of the company’s most significant risks of material misstatement in its financial statements.”

Despite the risk, the regulator said that the company gave Morgenthau control over its account and its financial reporting, “with little to no oversight,” which enabled him to make unauthorized withdrawals from the account for over a year without being detected. This also led to the company materially misstating its financials.

“This settled order with African Gold demonstrates that SPACs must comply with basic [regulatory] requirements, just like any other publicly traded company,” said John Dugan, associate director for enforcement in the SEC’s Boston office, in a release.

“The fact that African Gold did not discover the misappropriation of its funds for more than a year, when certain vendors refused to provide further services due to unpaid invoices, clearly indicates that the company neglected to comply with basic internal control requirements,” he added.

Morgenthau, who has already pled guilty to one count of wire fraud and agreed to forfeit US$5.1 million and pay US$5.1 million in restitution, is scheduled to be sentenced on April 25.