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Biden regulators could rain on Trump’s SPAC parade

Biden regulators could rain on Trump's SPAC parade
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By Matt Egan, CNN Business

Former President Donald Trump plans to return to Wall Street with a new media company targeting big tech companies.

But the Trump Group’s media and technology path into the stock market faces a formidable obstacle: President Joe Biden’s regulator.

Biden’s chief Wall Street cop, Securities and Exchange Commission Chairman Gary Gensler, is openly skeptical of SPACs, or special purpose buyouts. Trump’s SPAC deal features a set of red flags, including backing a Chinese company with a checkered regulatory history, that has caught the attention of federal authorities.

That’s why legal experts tell CNN that securities regulators are likely to scrutinize Trump’s SPAC policy closely, slowing down or even derailing the deal altogether.

“There is a significant risk that the SEC will shut it down,” said Thomas Gorman, a partner at law firm Dorsey & Whitney and a former SEC official.

Robert Lamm, head of securities and corporate governance practices at law firm Gunster, said that while he was not involved in the Trump deal, his experience tells him that the Securities and Exchange Commission can benefit from Trump’s SPAC policy by requiring entities to improve their disclosures.

“They are going to do everything they can to slow this deal down, to the point that it can’t go on,” said Lamm, who has represented the companies on disclosure matters, which often involves dialogue with the Securities and Exchange Commission.

The Securities and Exchange Commission declined to comment.

Organizers are investigating Trump a plumber

In October, Trump announced plans to launch a new media company that would “stand up to the tyranny of big tech.” Trump Media & Technology Group (TMTG) simultaneously announced a deal to merge with SPAC called Digital World Acquisition Corp.

SPACs collect funds from the public and pledge to use these funds to acquire private companies. It’s an increasingly popular way for private companies to go public, without the hassles and costs of a traditional initial public offering (IPO).

SPAC deals, also known as reverse mergers, have been the subject of discontent. But in recent years, the Spax has been all the rage, with celebrities, ex-politicians and professional athletes participating.

Almost immediately, Trump SPAC generated tremendous enthusiasm among some investors – and raised serious questions among experts.

For starters, TMTG has no known revenue or product. An Apple App Store listing indicates that the project plans to launch the Truth Social social media app on February 21.

As CNN previously reported, TMTG published an investor presentation in December that appears to contain errors and appears to have been partially copied and pasted from the Internet. (One segment defines the user as a “salesperson traveling to visit customers,” a definition that’s hard to reconcile with the fact that this is a media company rather than a sales platform.)

The new CEO of TMTG is former Republican Congressman Devin Nunes, who has no business experience in technology or social media.

Digital World has already revealed that federal regulators are investigating the deal.

However, based on Digital World’s closing price on Monday, TMTG achieved a staggering $11.4 billion market capitalization, according to Renaissance Capital, which provides ETFs focused on IPO and pre-IPO research.

Neither TMTG nor Digital World responded to requests for comment.

SPAC Support has a history with SEC

The authorities are already familiar with Arc Capital, a Shanghai-based company helping to get Trump’s media company to go public. Arc, also known as Arc Group, is the sponsor of Digital World.

In exchange for a stake in the company, sponsors typically provide financial support for starting SPACs, giving them the capital needed to hire attorneys, executives, and other employees. SPAC sponsors tend to buy shares in SPAC “on better terms” than investors in an IPO, the Securities and Exchange Commission notes.

As the Washington Post recently reported, Arc has a history of Securities and Exchange Commission investigations having “repeatedly helped the company set up or fund companies with little or no revenue, and no customers or office locations to point to mailboxes.”

To protect investors in Arc trades, the Securities and Exchange Commission has turned to a rarely used enforcement tool: stop orders.

In 2017, the Securities and Exchange Commission banned three Arc-backed companies from selling stock to the public, finding that they had “materially erred in the nature and scope of their business.” The agency has suspended trading in a fourth Arc-related activity.

Although Ark has not been charged in these cases, the fact that Trump’s deal involves a company whose transactions have been suspended by the Securities and Exchange Commission raises the eyebrows of legal experts.

“As soon as I see a China-sponsored company, with that kind of regulatory history, a red light comes on,” said Charles Whitehead, a professor at Cornell Law School.

Since 1995, the Securities and Exchange Commission has issued only 42 stop orders, according to the agency.

“You don’t want a stop order because it’s a black flag,” Whitehead said. “Usually, if there is an irreconcilable difference with the SEC, you withdraw your registration statement. Stop orders are uncommon because no one wants to get to the point of a stop order.”

Ark did not respond to multiple requests for comment.

Timing is key in Trump SPAC

Legal experts said the Securities and Exchange Commission will likely study closely whether Digital World misled investors about the timing of its deal talks with TMTG.

In late October, the New York Times reported that Trump began discussing a merger with Digital World long before the white-checking company went public and before such conversations were revealed to investors.

This raises the question of the accuracy of Digital World’s disclosures and whether it is really a blank check company. Some of the investors who bought Digital World when it went public last year may not know if they knew Trump was the target of the merger all along. Others would have done it but didn’t because they didn’t know Trump was involved.

“The blank check company is supposed to be a blank check company, not a haven for the Trump media company or anyone else to access the public markets,” said Cornell University professor Whitehead.

The Times reports that Trump has been discussing a deal with Digital World CEO Patrick Orlando since at least March 2021. However, in a filing last May, Digital World told investors it did not have a merger partner yet.

“We have not chosen any specific business objective nor have we initiated, nor has anyone on our behalf, engaged in any substantive discussions, directly or indirectly, with any objective of business combination,” Digital World said in this filing.

Last month, Digital World said in a statement that federal regulators are investigating the transaction and are seeking documentation and communications between the company and TMTG. Digital World said the Financial Industry Regulatory Authority, or FINRA, is also considering trading before the deal is announced.

Disclosure audit

Ashley Ebersol, a former SEC attorney who is now a partner in Brian Cave Leighton Pisner, said the timing of deal talks could become the core of the SEC’s law enforcement action.

Ebersol said that if the SEC found evidence that the promoters of the deal knew that these discussions should be disclosed and “intentionally concealed them from investors,” it would become the basis of a “potential SEC fraud charge.”

This will also give investors the ability to claim their money back, said Ebersole, which represents clients targeted by the Securities and Exchange Commission (SEC) and other regulators.

Jill Fish, professor of business law at the University of Pennsylvania Law School, said regulators will focus on the accuracy of disclosures — not the merits of the merger.

“The SEC doesn’t decide whether a merger is good or bad for shareholders,” Fish said. “This is not the job of the SEC. The Securities and Exchange Commission is concerned about whether investors will have the opportunity to evaluate the deal.”

Investors are unfazed by regulatory scrutiny

Gensler, chairman of the Securities and Exchange Commission, has raised concerns about SPACs on a large scale.

In July, the Securities and Exchange Commission tasked SPAC, sponsor, merger target, and CEO with “misleading disclosures” ahead of the proposed transaction. Gensler said in a statement at the time that the case illustrated “the risks inherent in SPAC transactions” as those who might reap profits from the merger could exercise “inadequate due diligence and mislead investors.”

At a conference last month, Gensler worried that investors in SPAC deals “may be making decisions based on incomplete information or just old hype.”

Trump a plumber has generated quite a stir among some investors. Although still far from its peak, Digital World is trading about 450% higher than it was before the Trump deal was announced.

Matthew Tuttle, CEO of Tuttle Capital Management, said the trading activity indicates little concern about regulatory risks around Trump SPAC.

“I don’t think there is a major concern, but there should be,” Tuttle said. “I would be afraid to buy this. I would be afraid to short this one. All I do is watch in amazement.”

Tuttle added that given the huge interest this agreement has attracted, regulators will likely scrutinize it more closely.

“If there was the slightest hint of a foul, they would try to drop the hammer on that thing,” he said.

Nobody saw it coming.

But that’s a delicate situation for the Securities and Exchange Commission, an independent agency run by a five-member bipartisan committee.

Trump’s ban on SPAC will open the agency to accusations of political bias and a legal fight with a former president who has a legendary history of filing lawsuits.

Lamm, Gunster’s attorney, noted that Congress controls the Securities and Exchange Commission’s budget, and the November midterm elections could give Republicans control of both the US Senate and the House of Representatives.

“Does the Securities and Exchange Commission want to risk cutting its budget?” Asked.

Gorman, the former SEC official, said agency officials would be more careful here, spending more time reviewing the case. But he said they wouldn’t shy away from acting, if that was justified.

They know Trump will be in dispute. It’s okay, Gorman said, “they are themselves in litigation.” “They won’t let him go out to sell scrap.”

During his tenure at the Securities and Exchange Commission, Gensler has repeatedly emphasized the agency’s role in protecting investors, in everything from cryptocurrency markets and trading applications to SPAC applications.

“If the SEC lets this go and goes down to zero, investors will be hurt,” Tuttle said of Trump SPAC. “That would be a big PR black eye for the Securities and Exchange Commission.”

Tuttle added that the SEC will seek to avoid a repeat of Archegos. The little-known US hedge fund collapsed this past year, catching regulators and investors off guard, and causing huge losses to Wall Street firms.

“Archegos can get away with it,” Tuttle said. “But that doesn’t come from the left. That’s Donald Trump.”

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