Shareholders Wary of DWAC Deal with Trump’s Truth Social

Right Wing Biz Watch

By David Lieberman, May 2, 2023

Is Digital World Acquisition Corp. (DWAC) preparing an eleventh-hour effort to salvage its embattled deal to funnel about $300 million to the parent of Donald Trump’s Truth Social platform? Or does it plan to come up with a new arrangement?

It looks like one or the other, based on a review of the annual report it released last week, which includes wide-ranging options for its 2021 pact with Trump Media and Technology Group (TMTG).

Possibilities raised in the report include:

·      Raise money privately so it has a separate pot of cash to make a deal with Trump without needing public shareholder approval.

·      Buy out shareholders who oppose the current deal.

·      And if the Trump deal collapses, then DWAC says it can consider other unspecified arrangements – possibly including one with an entity affiliated with its largest shareholder: Patrick Orlando, who remains on DWAC’s board after being terminated as CEO on March 19.

These are possibilities, not plans: DWAC says it still intends to make the Trump deal “using cash from the proceeds of our initial public offering” in 2021.

But public shareholders are wary. The SEC and Financial Industry Regulatory Authority are investigating DWAC for possible irregularities with the Trump deal. In addition, DWAC says in its report, TMTG has been subpoenaed by the SEC and a federal grand jury in the Southern District of New York.

The investigations “could materially delay, materially impede, or prevent,” the deal with Trump, DWAC says.

It has postponed a vote on the agreement three times to June 8. If it exercises its last option to delay a vote by three months to September 8 and still can’t persuade investors to approve, then the special purpose acquisition corporation (SPAC), might have to return its cash to its shareholders.

The Bumpy Road Ahead

The company’s stock price reflects Wall Street’s disillusion with DWAC’s prospects. Its shares sold for $10.00 apiece when it went public in September 2021 and soared after it announced its deal with Trump the following month, reaching a high of more than $100 in March 2022. They closed on Friday at $13.08.

DWAC’s report strongly suggests that shareholders would be better off rolling the dice with a Trump deal. If it collapses, then a repayment of the $300 million should net investors $10.45 a share.

But the actual repayment could be “substantially less” if DWAC needs money to pay creditors including lawyers and investment bankers. At the end of 2022 the SPAC had just $989 in cash outside of the $300 million from investors held in a trust for a merger or acquisition — and that would be returned to them if the company doesn’t make a deal.

If DWAC can’t pay its bills and files for bankruptcy protection, then creditors “could seek to recover some or all amounts” in the trust account. A court could impose additional punitive damages on DWAC if it concludes the SPAC acted in bad faith with creditors.

“We cannot assure shareholders that claims will not be brought against us for these reasons,” DWAC says.

Its accounting firm, Marcum LLP, isn’t taking any chances. It insists in its contract that it has a right to be paid from “monies held in the trust account” if DWAC runs short.

Marcum says in the annual report that at the end of 2022 DWAC lacked cash and working capital needed “to complete its planned activities” within a year. That raises “substantial doubt about the Company’s ability to continue as a going concern.”

One way to avoid a liquidation, DWAC says, would be to “raise additional funds through a private offering of debt or equity securities” and use that cash to make a deal with Trump “rather than using the amounts held in the trust account.”

There are “no prohibitions on our ability to raise funds privately, or through loans in connection with” the Trump deal, it says.

If that happened, then DWAC might use cash in the trust account “for general corporate purposes” which could include payments on the debts incurred to make the deal or “to fund the purchase of other companies.”

Another possibility is to buy shares from public stockholders who oppose the Trump deal and then “vote such shares in favor of” the merger, the report says. That would enable DWAC to combine with TMTG in a way that “may not otherwise have been possible.”

DWAC says there is “no limit” to the number of shares insiders could buy. It assures current public investors that cash from the trust would not be used for the stock purchases.

But it also warns that the transactions could reduce the number of publicly traded shares to a point that “may make it difficult to maintain or obtain” a listing on a national securities exchange such as NASDAQ – which is important for investors who want to trade stock in an easy and orderly way.

Different Targets

What happens if the pact with Trump collapses? DWAC says that up to September 8 it “may continue to try to complete an initial business combination with a different target.”

It expects to “receive a number of deal flow opportunities” and would probably focus on a company “in a single industry” instead of one that’s diversified. In a peculiar aside, DWAC says a target business, including TMTG, “may not have the necessary skills, qualifications or abilities to manage a public company.”

The report says DWAC is “not prohibited” from making a deal with a company tied to one of its current officers or backers. And it might not need public investors to approve as long as DWAC just buys assets or stock without a merger.

Although DWAC has nothing lined up, it notes that Orlando runs another SPAC, Maquia Capital Acquisition Corp, that also wants to back “technology-focused middle market and emerging growth companies in North America.”

Even after being ousted as CEO, Orlando maintains a cozy relationship with DWAC. He remains a director and controls 14.8 percent of its outstanding stock through his role as “managing member” of ARC Global Investments II LLC — which DWAC calls its “sponsor” and belongs to Abu Dhabi-based Arc Global Investments..

On April 21 DWAC issued $1.13 million in notes to Arc Global to “pay costs and expenses in connection with completing” the Trump deal.

The company pays another Orlando-controlled firm, Benessere Enterprises, $15,000 a month for “office space, administrative and shared personnel support services” at DWAC’s “executive offices” in Miami. That address is “a UPS Store nestled between an Italian restaurant and a nail salon in the waterfront neighbourhood of Coconut Grove,” the Financial Times says.

On April 5 DWAC made a similar $15,000-a-month deal with a firm controlled by Interim CEO Eric Swider for office space in Puerto Rico in what the Financial Times describes as “a residential property in a beach resort that boasts golf courses and a beach club.”

DWAC says it has no full-time employees and three officers who “devote as much of their time as they deem necessary” to its affairs.

DWAC recorded $18.3 million in formation and operating costs in 2022 and made about $4.3 million in interest on the $300 million in its investors’ trust account.

The SPAC submitted its annual report to the SEC after it requested a 15-day deadline extension so its accountants could complete the financial statements “without unreasonable effort or expense.”

Right Wing Biz Watch is a ongoing series of articles examining the business and finances of right wing media. Its author, David Lieberman, covered the media business full time for 30 years at USA Today and other publications before joining The New School as an Associate Professor in its  graduate Media Management program.

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