The company that was supposed to take former President Donald Trump’s Truth Social platform public will have to pay an $18 million penalty if the deal goes through.
Digital World Acquisition Corp., a special purpose acquisition company, or SPAC, settled charges that it violated antifraud provisions and misled investors about its plans for acquiring Trump Media & Technology Group, the Securities and Exchange Commission said Thursday.
Ironically, the company’s stock soared 50% in Friday trading following the settlement announcement. Digital World shares gained $6.58, jumping to $19.94, in midday trading.
At issue was the fact that Digital World Acquisition had a handshake deal to bring Trump Media public before the so-called “blank check” company went public itself. SPAC deals have fallen out of favor in the past two years but were hugely popular during the pandemic, with 613 IPOS in 2021 alone.
The way they work is that a shell company with no active business, like Digital World, gets listed on a stock exchange, which enables it to raise money from investors. The company then searches for a target company that aims to go public, and uses the cash from its IPO to buy it. If no merger is completed with a target company by a pre-set date, the investors get their money back.
Digital World raised $287.5 million in its IPO on Sept. 8, 2021.
Importantly, the rules say that the SPAC cannot have any discussions with its target for acquisition before its own IPO. But the SEC settlement shows that Digital World did just that, thereby misleading its investors, who were told in a regulatory filing that “neither the company nor its officers and directors had any discussions with any potential target companies prior to the IPO,” the regulator said in a release.
An SEC probe found that “dating back to February 2021, an individual who would later become DWAC’s CEO and board chairman, and others involved with DWAC, had extensive SPAC merger discussions” with Trump Media.
Digital World and Trump Media officially agreed to merge on Oct. 20, 2021, but the SEC probe found that talks and letters of intent to merge the two companies stretched back to February 2021.
The SEC also found that the former executive, who was not identified by name in the paperwork but was identified in media reports as DWAC’s former CEO Patrick Orlando, failed to disclose to investors “a potential conflict of interest based on an agreement he had signed” with Trump Media.
The regulator said “these disclosure failures are particularly problematic because investors focus on factors such as the SPAC’s management team and potential merger targets when making financial decisions.”
Even after Digital World and Trump Media disclosed their plans, the SEC said that Digital World filed misleading paperwork that did not reveal an agreed-upon $1 million break-up fee should the deal fail to go through.
If the merger with Trump Media or a deal with another company goes through by Jan. 1, 2025, Digital World must pay the $18 million fine, the SEC said. If no merger happens by then, the SEC will forego the penalty once Digital World shows it returned the money to its investors.
The settlement came a month after three people were hit with federal charges alleging insider trading ahead of the deal, generating $22 million in illegal profits.
The prospects for the merger plans appear dim. Investors gave a thumbs-down to the deal in September, and the platform itself has suffered from low usage, with only about 2 million active users. A few weeks later, Digital World officially changed its address to a UPS store.