Trump-Linked SPAC Faces Another Setback As Private Investors Withdraw $138.5M Commitment
Special Purpose Acquistion Companies or SPACs are weird creatures. They were designed to get replace the use of public shells as a means of going public cheaply. In the old days, one would find a public company that had over 500 shareholders but no assets or operations (i.e., a failed company) and then buy control by contributing some business or cash into the shell. After acquiring control of the shell, the investors would in effect have gone public without doing a full registration statement. Public shells were cracked down on by the SEC because promoters often engage in pumping and dumping the stock and other questionable activity. I had some clients who got taken by a public shell a while back. My clients sued and got part of their money back.
The SEC has cracked down on the use of public shell companies and SPACs came into play. In a SPAC, the shell company does a registered offering that is hard for the SEC to stop because there is no operations or prior history. The SPAC offers stock to the public and then lines up a private investment line of credit called a PIPE (private investment in public entity) where a group of investors commit to buy preferred stock in the SPAC at a favorable price. The preferred stock is convertible into common stock at a favorable rate. Then the SPAC finds an acquisition candidate and merge with or acquires the existing business. The PIPE is used to fund the needs of the new merged company and the PIPE investors get a great deal by converting their preferred stock at a favorable rate and selling in the public market.
Digital World Acquisition Corporation cheated in that the promoters of this entity evidently cut a deal with TFG's company (Trump Medial & Technology) before the initial public offering which meant that the SEC registration statement should had included financial statements TFG's company. The SEC and the DOJ are investigating this deal. SPAC documents require that the SPAC close the acquisition within a specified time period that can only be extended with a specified vote. DWAC was unable to get the required vote to extend the life of DWC and had to delay the vote by paying approximately $3 million. If the merger is not consummated between DWAC and TMT, then the approximate $280 million of cash held by DWAC has to be returned to DWAC's shareholders. Such cash is about $10.30 per share (the initial IPO price was $10 per share).
Investors in the PIPE have the right to cancel their commitment to purchase preferred stock in the new merged entity if the acquisition is not consummated by a specified date. Here the DWAC PIPE investors now have the right to cancel their commitments to buy preferred stock in the merger of DWAC and TMT was not consummated by September 20. PIPE investors who have committed to buy $138.5 million have already given notice that these investors have cancelled their obligation to buy preferred shares.
If the merger between DWAC and TMT had been consummated, TFG would have had $1.3 billion in capital to build a media company. Now it is likely that this transaction will not be consummated or if consummated, TFG's company will have less capital.
Link to tweet
https://www.msn.com/en-us/money/news/trump-linked-spac-faces-another-setback-as-private-investors-withdraw-138-5m-commitment-is-the-deal-at-risk/ar-AA12coXC?ocid=msedgdhp&pc=U531&cvid=0d6c0dd647f54220840194ac59642543
While announcing the proposed business combination with Trump Media & Technology Group in December 2021, Digital World said it has entered into securities purchase agreements with certain PIPE investors for subscribing to 1 million preferred shares in the SPAC at a purchase price of $1,000 per share. This would have fetched the company gross proceeds of up to $1 billion through the private placement.
The agreement with the PIPE investors provided for them to terminate their financing commitment if the closing of the PIPE has not occurred on or before Sept. 20.
Earlier this week, the FT reported that PIPE investors are seeking better terms or, in other words, reducing the conversion rate of the preferred shares so that it becomes viable for them.
With the SPAC deal pushed out due to a pending regulatory review, Digital World unilaterally extended the closing timeline by three months after failing to get concurrence from shareholders for an extension. The SPAC’s shareholders will meet in October 2022 to decide on the fate of the deal.
If the deal is not consummated, TMTG will be deprived of the $1.3 billion cash infusion it is supposed to get from Digital World.
Most of the current shareholders bought their DWAC stock for more than $10.30 per share. This deal is likely to fall apart or if this deal is somehow consummated, the company may not have the capital to have a chance of competing with the other social media companies.
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