Trump's SPAC Setback​

By Jake Rickman​

What do you need to know this week?

A United States federal grand jury has served Digital World Acquisition Corp (DWAC) — the blank-cheque SPAC that intends to acquire former president Donald Trump’s Trump Media and Technology Group (TMTG) — with a subpoena demanding access to certain documents. Separate subpoenas, which are court orders issued in contemplation of criminal charges, have been issued to other affiliated individuals and companies. Trump was not among those subpoenaed.

DWAC is a special-purpose acquisition company — SPAC — backed by Patrick Orlando, a Miami-based fund owner. TMTG is a company backed by Trump whose products include Truth Social, a right-wing social media platform.

No criminal charges have yet been filed, though Trump is currently the subject of several other criminal investigations related in part to his involvement in the 6 January 2021 riots in D.C.

Why is this important for your interviews?

Is this an indictment of SPACs as a whole, or just another instance of the whiff of criminality that seems to hang around Trump?

While it is sometimes best to avoid politics in the context of interviews, this does point to fundamental concerns regarding SPACs and investor risks. Given the controversy surrounding SPACs, developing a reasoned perspective on SPACS given this high-profile development will go a long way in an interview.

As we examined several weeks ago, SPACs can create perverse incentive structures where the SPAC sponsor benefits from any rise in share price, even if the outside investors never receive the returns they expected. This happens where sponsors are issued shares in the SPAC from the outset, rather than earning them after a performance milestone. In such a case, provided the take-public actually happens, regardless of the public share price afterwards, the sponsor stands to benefit because they have paid nothing for shares that have some public value. Whereas from the initial investors’ perspective, they want the price following the merger to exceed the price they paid up-front.

In DWAC’s case, the sponsor received “sponsor shares” up-front, which creates precisely the perverse incentive structure that SPAC critics decry.

The substance of the criminal investigation relates to DWAC’s dealings before the SPAC went public. The Securities Exchange Commission, which regulates SPACs, prohibits SPACs from having already committed to a deal before going public.

Therefore, one possibility is that the SPAC’s sponsors had already agreed to acquire TMTG before it went public with the intention to capitalise on the fervour that tends to accompany Trump. This could ultimately amount to unlawfully using material non-public information, which is a serious offence.

Why is this important for your interviews?

SPACs are, to put it mildly, controversial. Because the interests of the various stakeholders, including the sponsor, its initial investors, the target company, and public investors, may diverge and even conflict, each should have a team of lawyers to sort out the various legal and regulatory compliance issues that arise and to ensure each party’s interests are maximised.

Pomerantz LLP, which does not have an office in the UK, is investigating DWAC on behalf of public investors.