Trump’s SPAC—Scandal or Same Old Business? Continued…
In November, our team was published in several national publications analyzing the grounds under which the SEC might investigate Trump Media & Technology Group (TMTG) and Digital World Acquisition Corp. (Digital World)’s SPAC deal. Well, it appears that we read the tea leaves correctly, as Digital World has since revealed that it is under an SEC investigation.
By Michelle Genet Bernstein and Daniel S. Maland | Law.com DBR November 12, 2021
For brief background, on October 20, 2021, TMTG and Digital World announced that they entered into a definitive merger agreement, providing for a business combination that will result in TMTG becoming a publicly listed company, subject to regulatory and stockholder approval.
In the months leading up to its IPO, Digital World had no assets and no operations, which is typical for a SPAC. It then raised hundreds of millions of dollars of investment, not based on prospects of a de-SPAC merger with a former U.S. President’s media company, but on offerings of extremely lucrative and nearly risk-free investment terms. At the time, Trump’s name was not – at least in public – connected to this SPAC.
SPACs typically have up to two years to identify a target and de-SPAC. Digital World took mere months. If at the time of its IPO, Digital World had identified TMTG as its specific target, it would have been obligated to disclose details about that target and potential conflicts of interest in its registration statement (and then might not qualify as a true SPAC). That is why most SPACs state in their registration statements that they have not identified any target.
As is typical with SPACs, Digital World’s public securities filings consistently stated that the company and its executives were not engaged in any “substantive discussions, directly or indirectly,” with a target company. Those disclosures appear, however, to conflict with the reported discussions Digital World had with Mr. Trump starting in March 2021 and Given Trump’s stature as a public (and influential) figure, could be considered an omission of “material information” in violation of securities laws
Much of SPAC litigation is predicated on violations of Rules 10b-5 and 14a-9 of the Securities and Exchange Act of 1934. Rule 10b-5 is a catch-all anti-fraud provision which proscribes the making of untrue statements, misleading statements, or omissions regarding material facts in connection with the purchase or sale of securities. Rule 14a-9 proscribes false or misleading statements in proxy statements and solicitation materials sent to shareholders.
Now, we know that the SEC has begun investigating this merger. While we do not know the specifics, it is apparent that there are serious questions regarding the accuracy of Digital World’s disclosures, especially as they pertain to discussions with Trump’s TMTG. We are following this investigation closely, as where the SEC acts, civil litigation follows.
