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Trump new media deal draws SEC scrutiny of one company involved

The SEC said "the investigation does not mean that the SEC has concluded that anyone violated the law," the Digital World Acquisition Corp. filing said.
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The Securities and Exchange Commission is investigating one of the companies involved in former President Donald Trump's recently announced social media deal, according to documents made public Monday.

Trump has been touting the launch of his new media operation as a way to counter the large social media companies that banned him from their platforms after the Jan. 6 attack on the U.S. Capitol.

Digital World Acquisition Corp., known as DWAC, is the special acquisition company merging with Trump Media & Technology Group, known as TMTG, for his new social media platform. DWAC disclosed the investigation in a public filing with the SEC.

"DWAC has received certain preliminary, fact-finding inquiries from regulatory authorities, with which it is cooperating," the filing said.

They included an inquiry from the SEC early last month.

"DWAC received a voluntary information and document request from the SEC which sought, inter alia, documents relating to meetings of DWAC’s Board of Directors, policies and procedures relating to trading, the identification of banking, telephone, and email addresses, the identities of certain investors, and certain documents and communications between DWAC and TMTG," the filing said.

It added, "According to the SEC’s request, the investigation does not mean that the SEC has concluded that anyone violated the law or that the SEC has a negative opinion of DWAC or any person, event, or security."

A spokesman for the SEC declined to comment.

DWAC also received information requests from the Financial Industry Regulatory Authority, or FINRA, in late October and early November "surrounding events (specifically, a review of trading) that preceded the public announcement of the October 20, 2021 Merger Agreement," its filing said.

The filing said FINRA told the company that "the inquiry should not be construed as an indication that FINRA has determined that any violations of Nasdaq rules or federal securities laws have occurred, nor as a reflection upon the merits of the securities involved or upon any person who effected transactions in such securities."

Neither DWAC nor TMTG immediately responded to requests for comment about the filing.

Trump Media & Technology Group announced the deal in a statement Oct. 20, saying it and DWAC “have entered into a definitive merger agreement, providing for a business combination that will result in Trump Media & Technology Group becoming a publicly listed company, subject to regulatory and stockholder approval.”

The companies announced in a statement Saturday that they had lined up $1 billion in committed capital for Trump's new social media platform, Truth Social. Trump, who is the chairman of TMTG, said the money “sends an important message to Big Tech that censorship and political discrimination must end,” adding, “America is ready for TRUTH Social, a platform that will not discriminate on the basis of political ideology.”

“As our balance sheet expands, TMTG will be in a stronger position to fight back against the tyranny of Big Tech,” he said.

Stock in DWAC — a type of company known as a special purpose acquisition company, or SPAC, that is set up solely to raise capital in the public markets to buy private firms — skyrocketed after the announcement, shooting up by over 1,600 percent before it cooled off.

The SEC signaled its interest in SPACs in April, when a top official published a statement warning market participants that the agency would scrutinize such deals. The SEC's staff was reviewing filings made by these companies and "seeking greater disclosures," the statement said, "so that the public can make informed investment and voting decisions about these transactions."

Special acquisition vehicles like DWAC are essentially shell companies whose shares trade publicly. They raise money from investors to buy private companies that then become public after the acquisitions. The popularity of such companies and transactions has exploded since last year; they were uncommon until fairly recently.

A reason the SEC may be eyeing SPACs is that insiders at the shell entities can receive financial incentives when they set them up and are positioned to reap large gains later when outside investors buy in.

In a letter to the SEC last month after DWAC share prices dropped from $175 to under $60, Sen. Elizabeth Warren, D-Mass., said the Trump deal is "looking suspiciously like a scheme in which 'the salesmen behind all of this should be fine, even if those who fall for their sales pitch get screwed.'"

She asked the agency to investigate whether DWAC “may have committed securities violations by holding private and undisclosed discussions about the merger as early as May 2021, while omitting this information” from SEC filings and public statements.

She noted that DWAC had "indicated in numerous SEC filings between May 25, 2021 and September 8, 2021 that the organization had 'not selected any specific business combination target' and had not 'initiated any substantive discussions, directly or indirectly, with any business combination target,'" while The New York Times has reported that the "SPAC’s sponsor was discussing a deal with former President Trump as early as March 2021."

SPACS "are required to disclose any direct or indirect conversations with potential target companies," Warren wrote. "DWAC and Trump Media and Technology Group, however, appear to have brazenly flouted these rules."