Publicly Traded Investment Vehicle Faces Settlement over Fraud Charges

by Warren Seah

A publicly traded investment vehicle that has announced plans to merge with Donald Trump’s Truth Social media company has reached a settlement with the Securities and Exchange Commission (SEC) over fraud charges. The Digital World Acquisition Corporation (DWAC), a special purpose acquisition company (SPAC), or “blank check” company formed in 2021, was ordered to pay an $18 million civil penalty fee if it completes its planned merger with the Trump Media and Technology Group and becomes public.

Misleading Investors and Failure to Disclose

Regulators allege that the DWAC misled investors about its intentions to acquire Trump’s media company, the parent of the Truth Social media network. Specifically designed to attract Trump’s followers, the Twitter-like business had not been disclosed to investors as they raised money for the venture, constituting a fraudulent act. DWAC had successfully raised nearly $300 million in its initial public offering.

Understanding the Special Purpose Acquisition Company (SPAC)

A SPAC is typically established as a shell company to secure funds for an acquisition once it becomes public. In these arrangements, the company selects its merger target after raising funds from investors and going public.

The settlement reached between DWAC and the SEC highlights the importance of transparency and disclosure when it comes to investment vehicles and their merger intentions.

SEC Accuses DWAC of Violating Disclosure Requirements

The Securities and Exchange Commission (SEC) has accused Digital World Acquisition Corp (DWAC) of failing to disclose discussions with former President Donald Trump’s company, Trump Media & Technology Group (TMTG), and violating SEC requirements. The SEC revealed that DWAC’s former CEO, Patrick Orlando, engaged in extensive merger talks with Trump’s company as early as February 2021. However, when DWAC filed forms related to its initial public offering (IPO) in September of the same year, these discussions were not disclosed.

A month after the filing, DWAC and TMTG announced their plans to merge, a deal that is yet to be finalized. Gurbir Grewal, the director of the SEC’s enforcement division, emphasized the significance of proper disclosure for Special Purpose Acquisition Companies (SPACs) like DWAC, which are “blank-check” entities without actual business operations. Investors heavily rely on information about the management team and potential merger targets when making financial decisions.

DWAC representatives have not responded to requests for comment regarding these accusations.

In a separate incident related to the merger announcement with Trump’s company, three individuals from Florida, including a DWAC board member, have faced federal criminal charges of insider trading. The defendants are alleged to have profited around $23 million from this activity.

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