Securities violation allegations for Trump SPAC again raises concerns on SPAC IPO model
Last year was the year of SPAC mergers. Inevitably, perhaps, this year is shaping up to be the year of SEC investigations. Just last week, we published a post about an SEC enforcement action against the Akazoo SPAC transaction after the target company was caught falsifying customer data. Moments later, a huge new SPAC fraud story broke: Donald Trump’s new media company’s recently announced SPAC merger may have broken a whole series of securities laws.
For better or worse, our securities regulations are what’s called a “disclosure regime.” As long as you disclose what you’re doing to your investors and the public at large, you can get away with a lot. Former President Trump and the SPAC that wanted to buy his media venture, Digital World Acquisition, seem to have failed this low bar. As first reported by the New York Times, Digital World Acquisition was in talks to buy President Trump’s company from before its first public filing—a big no-no. SPACs get away with disclosing very little at their IPO precisely because they are supposed to be “blank checks” with no business plan beyond finding a good target company to acquire. Having a potential target in your sights, and failing to disclose that, is a fundamental failure to follow the (already quite loose) SPAC rules.
Assuming these facts are borne out, this transaction fundamentally puts the lie to the whole idea of a “blank check.” And it also exposes yet another investor-unfriendly risk inherent in the SPAC business model. Investors are supposedly investing in the business acumen of the SPAC sponsor—and that’s it. But that’s never how it works in reality. SPAC sponsors have every incentive to embrace the headline-grabbing, meme-stock generating, media-frenzy getting company du jour. Hence, when the Trump SPAC deal was first announced, Bloomberg’s Matt Levine asked whether “all of recent financial history has been leading up to this moment?” He wasn’t wrong, but it seems he was premature. Truly, all of recent financial history has been leading up to the SEC investigation of the Trump SPAC merger.
Whether the Akazoo enforcement action and the Trump SPAC investigation are the beginning of the end of the SPAC craze remains to be seen. At minimum, with the continued strength of the SEC Whistleblower Reward Program to support enforcement efforts, it seems inevitable that we will only see more enforcement actions in this space. And SPACs may finally be confronting the reality of the securities laws they should have been abiding by all along. For example, recent headlines have proclaimed that law firms are suddenly recommending SPAC sponsors do a “thorough vetting” of SPAC targets. Of course, investors probably thought they were doing such vetting all along.
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