By Thornton McEnery
Despite what appears to be a very targeted probe, DWAC tells investors that the SEC has no bad opinion of its deal with Trump.
SEC chief Gary Gensler apparently thinks the so-called "Trump SPAC" got some 'splaining to do.
Digital World Acquisition Corp. (DWAC), the blank-check company looking to take Donald Trump's inchoate media empire 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 appear curious about trading activity leading up to the merger announcement, and the timing of the deal between DWAC and Trump Media & Technology Group.
"DWAC has received certain preliminary, fact-finding inquiries from regulatory authorities, with which it is cooperating," reads the filing which goes on to divulge that it received letters of inquiry from Finra and the SEC in late October and early November, after publicly-traded 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 did not disclose it to investors, that would be a violation of securities regulations governing blank-check companies.
Those reports came to the attention of Senator 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."
And those questions look rather targeted.
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 took pains to make 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," mused Francis Curran, a securities litigation attorney at Kudman Trachten Aloe & Posner, sardonically adding "But sure, it doesn't mean anything, and the SEC has no opinion."
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 as a PIPE. For SPACs, PIPEs are a way to raise more private capital and juice up its valuation before going public by offering new shares to institutional investors at what is usually a pretty steep discount.
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 a $1 billio PIPE laid, 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 by asking more and more questions.
"100 years ago, this would have been a Blue Sky Law," said Curran, referring to the early Twentieth 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 is not 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.
(END) Dow Jones Newswires
December 06, 2021 14:27 ET (19:27 GMT)
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