Donald Trump’s social media company is having a tough time going public. The blank-check firm it’s merging with is running out of time to complete the takeover.
The deal between Digital World Acquisition and Trump Media and Technology Group, which operates the Truth Social app, has not yet closed because it’s under investigation by federal securities regulators. The New York Times has reported that Digital World held meetings with Trump and his firm six months before it went public and did not disclose that to investors.
There is $1.3 billion in investment awaiting Trump’s media enterprise should the deal close, but Digital World’s stock price fell more than 10% on Sept. 6 as Reuters reported that an important shareholder vote to extend the takeover’s deadline is expected to fail.
While Digital World’s management can pay millions to buy itself six more months, the ordeal shows the practical limitation of what happens when two of the trendiest buzzwords in finance—SPACs and meme stocks—converge.
Blank-check companies like Digital World—called special purpose acquisition companies, or SPACs—have limited windows in which they need to merge with a company or else they must liquidate and return investors’ money. Digital World had a one year period, which will expire tomorrow, Sept. 8.
But an important shareholder vote reportedly failed to attract the approval of 65% of total investors. Digital World said in a regulatory filing late yesterday that it will post about $3 million in order to extend its deadline by three months, until Dec. 8. If the deal doesn’t close by the new December deadline, or shareholders do not vote on a longer extension, Digital World management can only execute one more of these three-month $3 million extensions.
The shareholder vote is expected to fail in large part because Digital World has become a popular meme stock, disproportionately traded by individual retail investors rather than institutional investors like hedge funds and pensions. According to data from FactSet, only about 18% of Digital World shares are owned by insiders and institutional investors, meaning that up to 82% could be retail investors.
This meme stock popularity has driven the price of Digital World—a shell company which only exists to merge with another company—to high and volatile prices. The stock hit an intraday high of $175 in October 2021 after announcing its deal with Trump Media.
Digital World went public through an initial public offering in September 2021 as a blank-check company. In a release at the time, the company said it is open to merger partners in various sectors but intends to target “middle market and emerging growth technology-focused companies,” including software-as-a-service and financial technology companies. But, as The New York Times reported in October 2021, Digital World CEO Patrick Orlando held business meetings and an investor presentation with Trump in March 2021, six months before the IPO.
In November 2021, US Senator Elizabeth Warren wrote to the US Securities and Exchange Commission (SEC) asking it to investigate whether Digital World violated federal securities laws by not disclosing its intentions to shareholders. In the letter, Warren wrote that this is a “textbook example of a SPAC misleading shareholders and the public about materially important information.”
The merger is under investigation by the SEC and the Financial Industry Regulatory Authority (Finra), as well as a federal grand jury in New York. In the criminal investigation, employees of both Digital World and Trump Media have been subpoenaed. It’s unclear if Trump himself was subpoenaed.
SPACs, which became very popular during the last bull market, have largely seen their moment pass. The SEC has proposed new rules in March aimed at increasing transparency and reporting requirements around these deals.
“The bubble has burst—and I would even say it burst a long time ago,” said Michael Ohlrogge, a professor at New York University School of Law. But the problem with Digital World has more to do with its own regulatory scrutiny, he said, than the struggles of SPAC deals or the chilled IPO market.
If the takeover isn’t completed by Sept. 8, Digital World must liquidate and pay out all shareholders about $10.20 per share (the $.20 is interest accrued since the IPO). This is a tough proposition for shareholders who have seen this meme stock soar to $175 per share.
Usha Rodrigues, a professor at University of Georgia School of Law, called the proposition for shareholders “economically irrational.”
“If you’re a shareholder and the stock is worth $25—and you’re told if you don’t vote yes for this thing, you’re going to get $10.20 back—why wouldn’t you vote for it?” Rodrigues said.
Instead, Rodrigues and Ohlrogge surmise, the glut of retail investors are probably not showing up for the vote. And Digital World needs 65% of all shareholders to approve, not just 65% of the votes. So, skipping the vote is the same as voting no.
The failed deadline is not only a costly hiccup for Trump’s media deal, but reveals a problem with being a firm mostly owned by meme-stock retail investors.