By Thornton McEnery
Securities and Exchange Commission Chairman Gary Gensler, and other regulators, want some details on the so-called “Trump SPAC.”
Digital World Acquisition Corp. /zigman2/quotes/229933747/composite DWAC +2.63% , the blank-check company looking to take Donald Trump’s startup media company public, closed on $1 billion in private equity funding over the weekend according to a Monday SEC filing, but the company also disclosed that it is under investigation by federal regulators who want to know about trading activity and communications centered around DWAC and the announcement of its plans to merge with Trump Media & Technology Group back in October.
“DWAC has received certain preliminary, fact-finding inquiries from regulatory authorities, with which it is cooperating,” reads the filing. DWAC said that it received letters of inquiry from the Financial Industry Regulatory Authority and the SEC in late October and early November, after shares in the SPAC soared as high as 1,600% after the proposed merger with TMTG was announced , making it the first MAGA meme stock.
In the weeks after that wild spike, reports surfaced that DWAC’s founder –Florida and Wuhan, China-based financier Patrick Orlando—had met with Trump early in 2021, well before DWAC’s listing on Sept 2. If the two did plan to take TMTG public via DWAC and didn’t disclose that information to investors, that would be a violation of securities regulations governing blank-check companies.
Those reports came to the attention of Sen. Elizabeth Warren, who wrote an open letter to Gensler on Nov. 17 demanding that he take a closer look at DWAC.
But apparently, Gensler was already on it.
“It’s really not a surprise given all the media coverage of the SPAC and the way it traded,” said James Angel, a professor, at Georgetown University’s McDonough School of Business.
“When the SPAC goes public, it’s supposed to make full disclosure,” explained Angel. “If they went public without telling investors they’d been talking to Mr. Trump, then a regulator might have to ask some questions.”
According to Monday’s filing, the SEC requested “documents relating to meetings of DWAC’s Board of Directors, policies and procedures relating to trading, the identification of banking, telephone, and email addresses, the identities of certain investors, and certain documents and communications between DWAC and TMTG.”
But the filing also made it clear that “the investigation does not mean that the SEC has concluded that anyone violated the law or that the SEC has a negative opinion of DWAC or any person, event, or security.”
For at least one securities lawyer, that clarification seemed amiss.
“What the SEC is asking for; trading info, names of investors, calls with Trump, seems pretty detailed and specific,” said Francis Curran, a securities litigation attorney at Kudman Trachten Aloe Posner.
Monday’s filing was ostensibly about DWAC announcing that it had raised another $1 billion through a private investment in public equity deal, often referred to using the acronym PIPE. For SPACs, PIPEs are a way to raise more private capital.
For DWAC, the new funding means that instead of its announced deal to take the former president’s not-yet-launched media brand onto the public markets at an $875 million valuation, it will now be doing do at around $3 billion.
But the probes into DWAC also raise a larger question about its choice of TMTG, a company that –despite the promise of leveraging Trump’s brand to create a “non-woke” alternative media empire—is preparing to enter the public market without any concrete revenue-generating products at a $3 billion valuation.
“At this point, it’s vaporware,” Angel said of TMTG. “But our ex-president does have a certain amount of popularity in this country and some very real media savvy. This is a question of how much the Trump brand can be monetized.”
Based on how quickly DWAC and TMTG managed to get $1 billion raised for the PIPE, the answer seems to be that the brand can be monetized a lot, and it doesn’t seem like Gensler would have any recourse to stop the deal other than delaying the listing with more questions.
“One hundred years ago, this would have been a Blue Sky Law,” said Curran, referring to the early 20th century, state-by-state regulations designed to protect investors from fraud in the speculative frenzy that led up to the 1929 market crash.
For Angel, however, the controversial merger between DWAC and TMTG isn’t so much a new frontier in regulatory activism but an acknowledgment of a very American tradition.
“One of the beautiful things about the American system is that the way we head off actual corruption is to make it so easy for you to make money when you leave office,” he opined. “This is Mr. Trump’s big chance to cash out on his presidency.”
DWAC shares were trading down more than 2% at midday Monday.