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Digital World Acquisition Corp (DWAC): The Truth About Deal Risk

By Jacob Wolinsky. Originally published at ValueWalk.

Digital World Acquisition Corp

Kerrisdale Capital is short shares of Digital World Acquisition Corp. (NASDAQ:DWAC), a SPAC valued at over $8bn on a pro forma basis, because we believe it will never secure the necessary regulatory approval to close its proposed merger with Trump Media & Technology Group (TMTG). While recent pressure on DWAC shares has been attributed to the executive exodus at TMTG and Elon Musk’s interest in acquiring Twitter, DWAC’s stock has much further to fall given the demonstrably misleading statements in DWAC’s registration statement, the status of TMTG’s operations at the time the merger agreement was executed, the cast of characters seeking to consummate that merger and those individuals’ flagrant disregard for SEC rules and regulations. DWAC is not just another dubious 2021 SPAC; it is a poster child for some of the worst abuses the investment vehicle has spawned.

Q1 2022 hedge fund letters, conferences and more

Recent SEC actions confirm that 1) the agency is serious about reining in a financial sector widely regarded as rife with potential fraud and conflicts of interest, and 2) SPAC enforcement investigations are priority matters within the commission. In DWAC, the SEC has been handed textbook examples of the types of SPAC-related misconduct that it is intent on shutting down. And, given DWAC’s and TMTG’s exceptionally high profile, an aggressive enforcement action would be an ideal way for the SEC to send a loud, unmistakable message to the industry. DWAC has admitted it is under SEC investigation for statements made in its S-1, as well as the timing and circumstances surrounding its proposed merger with TMTG. A prime actor in this affair is an obscure Chinese investment firm, ARC Group, that has been repeatedly punished by the SEC for lying about the true nature of businesses that turned out to be shell companies. Investors should abandon the fantasy that DWAC’s problems can be easily remedied with amended disclosures and a nominal fine. Contrary to the uninformed views of bulls, the SEC does have the ability to effectively kill the proposed merger, using, ironically, the same mechanism it used to kill three of ARC Group’s companies just five years ago.

Truth Social’s disaster of a launch, among many other red flags regarding TMTG, raise valid concerns over execution and the company’s long-term viability. But more importantly, these factors raise serious doubts regarding the scope of due diligence DWAC conducted in the six weeks between its IPO and execution of the TMTG merger agreement. Starting a social media platform from scratch, particularly one linked to the former President, requires experienced leadership and resources across a host of critical technical disciplines. In addition, as the post-merger surviving operating business, TMTG would reasonably be expected to have the infrastructure necessary to function as a public company. Yet, none of that remotely existed when DWAC signed the merger agreement with TMTG. By all indications, in October 2021 TMTG was a shell company with no or only nominal operations. To gain SEC approval of a supposedly forthcoming S-4, DWAC needs to accurately detail the extent of the due diligence it conducted regarding TMTG within just six weeks, as well as explain the specific reasons why it believes merging with a de facto shell company is in DWAC shareholders’ best interests. Given these challenges we think there is significant risk DWAC never files an S-4 at all.

Six weeks into Truth Social’s bungled launch, senior executives are already fleeing. Six months after the merger, DWAC still hasn’t filed even an initial S-4. With each passing day, the truth becomes harder to deny; a merger between two sketchy companies that is already taking too long is likely headed for collapse. We value DWAC at the cash held in trust: $10 (-80%).

Digital World Acquisition Corp

Executive Summary

DWAC’s proposed merger with TMTG faces massive regulatory and legal risks. DWAC’s merger is still dependent on regulatory and shareholder approval. As a condition to closing the transaction, DWAC must have an effective registration statement on an S-4 that, among many other requirements, accurately details: the identities and affiliations of all relevant parties, the nature and scope of the target’s business operations, and credibly demonstrates the thoroughness of DWAC’s due diligence in recommending the deal to its Board. Given the mountain of red flags that encompass nearly every aspect of this proposed merger, we believe DWAC will never file an S-4 and if it does, it will never go effective.

Flurry of negative developments further threaten merger prospects and exacerbate operational challenges. On March 30th, the SEC proposed sweeping new rules designed to better align the disclosure requirements and rules governing SPACs with those of traditional IPOs. On April 4th, Reuters and Politico reported Truth Social’s CTO and Chief Product Officer, as well as TMTG’s Chief Legal Officer, quit after the app’s mistake-riddled launch, gutting an executive team that already lacks expertise. Former Representative (R-CA), Devin Nunes, assumed the CEO position in January 2022 with zero prior tech company experience. Also on April 4th, Elon Musk disclosed purchasing a 9.2% stake in Twitter, quashing loose speculation that he would support a competing new service and sparking concerns that reinstatement of former President Trump to Twitter would make Truth Social irrelevant. On April 12th, DWAC filed an (untimely) 10-K that omitted important disclosures, among other problems.

The SEC can and likely will use DWAC to send a message to market participants. DWAC is under active investigation by the Enforcement Division of the SEC. Issues of SPACs’ disclosures and ways to hold them more accountable for their due diligence are now foremost at the Commission. In DWAC, the SEC has been handed a litany of abuses which speak directly to its new policing efforts and involve a recidivist in ARC Group. One shouldn’t bet on anything but the whole book (and then some) being thrown at DWAC – and that includes a stop order which would effectively kill a deal in its tracks. Reddit bulls hiding behind the factually accurate but toothless argument that “the SEC does not have authority to block mergers” and claiming regulatory risk is mere “FUD” are completely ignorant of the legal realities.

PIPE financing enriches institutional investors at retail’s expense. Announced after DWAC became a meme-stock sensation, the company’s mammoth $1bn PIPE financing allows presently unidentified institutions to receive shares at up to a 40% discount, short the stock, and flip their positions the day after the merger closes. As such, the PIPE doesn’t represent any vote of confidence in a compelling media company by sophisticated institutional investors – it’s simply a way to incur minimal risk while fleecing retail shareholders. The SEC will not look kindly on this.

Valuation is absurd and financial projections are based on the flimsiest of assumptions. TMTG has a few months of largely pathetic operating history, no financial performance to speak of, and is already suffering from executive departures. Yet the pro forma company is valued at an incredible $8.2bn. Subscriber projections for Truth Social are based solely on an unreliable Politico poll, while the TMTG+ SVOD service is supposed to miraculously win 50% of Netflix’s US subscriber base by 2026 by streaming “non-woke” entertainment without any explanation as to how it will afford billions of dollars in content.

​​​​​Read the full report here.

Sahm Adrangi

Kerrisdale Capital Management, LLC

About Kerrisdale Capital

Kerrisdale Capital is a value-oriented and special situations investment manager.

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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

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