Trump venture uses popular shortcut to Nasdaq

October 24, 2021

New York: In seeking capital to build up his fledgling media venture, former US president Donald Trump has turned to an increasingly popular investment vehicle: a special purpose acquisition company...

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New York: In seeking capital to build up his fledgling media venture, former US president Donald Trump has turned to an increasingly popular investment vehicle: a special purpose acquisition company (SPAC).

The ex-president´s startup, Trump Media & Technology Group, announced Wednesday it will merge with a SPAC called Digital World Acquisition Corp, and plans a national launch of Trump´s social media network in early 2022.

A SPAC is sometimes called a "blank check" company since it raises funds from investors with the purpose of merging with another entity.

They have been an increasingly popular way for companies to go public in recent years because it is usually faster, less costly and less onerous in terms of regulatory requirements than a traditional initial public offering or IPO.

The vehicle is favored by investors who want to cash out with gains after a company announces its merger partner or sells shares publicly.

Companies that have used this path to go public include Virgin Galactic, Richard Branson´s space travel venture, and WeWork, the office-sharing company that made its long-delayed debut on Thursday.

Over the last year, there have been 350 companies that have gone public with SPAC, raising more than $108 billion, according to Dealogic.

Around half of these have merged, attaining about $379 billion in market value.

But SPACs also have drawn greater attention from regulators due to questions over transparency.

The vehicle has looser standards around earnings projections than traditional IPOs, a feature that critics say can result in investors being misled.

Also, initial investors often have no idea who the SPAC´s ultimate merger partner will be. That was the case with Digital World, whose ticker is "DWAC."

In some cases, investors in DWAC were surprised -- and disappointed -- to learn they were helping to support Trump´s latest venture.

Saba Capital opted to divest most of its holdings in DWAC, the New York Times reported Friday, a sell-off that did not prevent the company´s share price from soaring.

The new investment vehicle soared again Friday in a frenzy that reflects the former president´s staying power, as well as a stock market increasingly prone to casino-like tendencies.

Shares of Digital World Acquisition Corp surged on Friday prompting a temporary trading halt for a second straight day.

Shares ended at $94.20, more than doubling its value from Thursday and more than nine times the price on Wednesday afternoon before the venture was announced.

"It´s a piling in effect. Everyone is just hoping the next person who comes is willing to pay more," said analyst Patrick O´Hare.

While Trump remains a beloved figure to a sizeable minority of the US population, pundits said he could face challenges in building the sort of "media powerhouse" described by in a TMTG presentation, which includes plans for social media and streaming services.

Digital World, which trades under the ticker "DWAC" on Nasdaq, is a special purpose acquisition company (SPAC), sometimes called a "blank check" company because it is set up with the sole purpose of merging with another entity.

The ventures raised $293 million in an initial public offering in September.

Use of SPACs has soared in the last couple of years amid low interest rates, as investors look for higher returns, and provides a short cut to sell shares publicly. Office-sharing company WeWork employed the strategy to go public on Thursday.

A joint press release from the TMTG and Digital World said the companies plan to launch "TRUTH Social" a social media platform nationally early next year.

The new outlet will serve "a rival to the liberal media consortium and fight against the ´Big Tech´ companies of Silicon Valley, which have used their unilateral power to silence opposing voices in America."

Trump set the national media agenda with aggressive use of social media sites such as Twitter and Facebook, a technique that propelled him to the presidency, where he frequently announced policies with tweets.

But the former president was tossed from both platforms after he goaded supporters into a violent takeover of the US Capitol on January 6 of this year while falsely claiming election results were fraudulent.

In the wake of those events, Trump´s hotel business lost key deals with the Professional Golf Association, among other groups.

Following the Trump deal, Saba Capital sold most of its shares in Digital World in a reprimand of the former president, The New York Times reported.

While Trump has been underestimated before, some commentators noted that TMTG will face hurdles.

In the aftermath of January 6, the conservative social media site Parler was cut off from platforms operated by Amazon, Apple and Google because of concerns on how it was policing content that incited violence.

Rich Greenfield, partner at research firm LightShed Ventures, said TMTG likewise could get "boxed out" since it is not initially focusing on building its own Internet infrastructure.

"If it´s like Parler, they´re going to run into the same problem," Greenfield told CNBC.

Other experts noted that successful social media firms require a growing mass of users who post frequently, a challenge to recreate given the existing platforms.

The jump in the DWAC share price is reminiscent of outsized gains earlier this year by GameStop and other so-called "meme" stocks that soared in ways detached from business fundamentals, O´Hare said.

"It´s gambling," he added. "There is no fundamental reason you´re seeing the moves you´re seeing." Some on Wall Street Bets, a Reddit platform central to the meme stock phenomenon, also saw parallels. "Turns out that DWAC was the new GME," one user wrote, referring to GameStop´s ticker symbol.

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