Trump’s SPAC—Scandal or Same Old Business?
Last month’s announcement that former President Donald Trump’s newly formed media company, Trump Media & Technology Group (TMTG), planned to go public through a merger with the publicly-traded special purpose acquisition company, or SPAC, (SPAC) Digital World captured the attention of securities lawyers, finance industry participants, and Trump supporters.
By Michelle Genet Bernstein and Daniel S. Maland | Law.com DBR November 12, 2021
EXCERPT
Last month’s announcement that former President Donald Trump’s newly formed media company, Trump Media & Technology Group (TMTG), planned to go public through a merger with the publicly-traded special purpose acquisition company, or SPAC, (SPAC) Digital World captured the attention of securities lawyers, finance industry participants, and Trump supporters. Immediately, the details as to how this happened, when this happened, and whether this new company will perform pervaded the popular press, and got the general American public focused on SPACs.
SPACs, or special purpose acquisition companies, are “blank check” public companies formed to merge with or acquire an existing private company for the purpose of taking it public. When a SPAC business combination—or de-SPAC transaction—is announced, the SPAC’s original shareholders, typically sponsors and other institutional investors, have the opportunity to redeem, i.e., get their shares repurchased. The merger of a SPAC with a target company also triggers certain challenges that go along with a company having to rapidly get ready to operate as a public company, such as meeting an accelerated public company readiness timeline, as well as complex accounting and financial reporting/registration requirements, including the filing of a prospectus with fulsome disclosures relating to the target company. While SPACs are not new, they have gained popularity over the past 18 months, in part because they do not present onerous regulatory hurdles and disclosure requirements as other avenues for taking a company public, most commonly, the initial public offering (IPO). Earlier this year, the SEC has signaled a crackdown of SPAC regulation and telegraphed a need for reform in this space, particularly relating to disclosure requirements.
Trump’s SPAC has garnered unique attention both due to Trump’s prominence in the public eye, as well as to the timeline of the deal. The simplified facts are as follows: in February, a new social media company, Trump Media & Technology Group (TMTG) was formed. The New York Times recently reported that, one month after its incorporation, in March, TMTG began discussions with a SPAC named Digital World Acquisition. Following those reported discussions, in May, Digital World filed for its IPO and subsequently became available for sale on the NASDAQ in September. The next month, on Oct. 20, Digital World filed its Form 8-K with the SEC, disclosing its plan for a business combination with Trump’s TMTG.
The speed with which Digital World listed, went public, and then disclosed its business combination, raised eyebrows. SPACs typically have two years to locate a target and de-SPAC. Digital World took mere months. In addition, Digital World’s public securities filings consistently stated that the company and its executives were not engaged in any “substantive discussions, directly or indirectly,” without a target company. Those disclosures appear to conflict with the reported discussions Digital World had with Trump starting in March, which given Trump’s big name, could possibly be considered an omission of “material information.”
However, […]
That said, securities lawyers and investors are paying close attention. As SEC Chair Gensler noted while testifying before a House subcommittee earlier this year, “each new issuer that enters the public markets a potential risk for fraud or other violations.” Trump enthusiasts are betting big on this play, seeing it as strategic business advantage to get into business with the Trump name. Hedge funds on the other hand are exiting the deal, having seen their investments skyrocket following the announcement, and demonstrating a skepticism about getting into business with the controversial former president. No question the SEC is watching. Where the SEC chooses to act, civil litigators will follow.
Read the full commentary on the Daily Business Review here
