President Donald Trump announced in December that his Truth Social platform, owned by Trump Media & Technology, would launch in the first quarter, then Reuters reported that Truth Social would debut in February. Following this latest report, Digital World Acquisition Company (NASDAQ:DWAC) the stock soared.
In fact, DWAC stock went from its closing price of $50.37 on January 5 to a high of $86.31 on January 18. The shares then fell to around $73.
Of course, the decline in the stock market during this period played a large role in Digital World’s decline. But I believe speculation about the SEC blocking the merger also played a role in the slowdown.
According to proponents of this theory, the SEC is likely to block the merger between Digital World and Trump Media. In violation of agency rules, Trump Media executives discussed a potential merger with Digital World before the special-purpose acquisition company launched its IPO.
It should be noted that Digital World announced in December that the SEC and the Financial Industry Regulatory Authority had investigated the matter in November.
Here are four reasons why I don’t expect the SEC to block the merger.
A veto would be bad policy.
As we know, President Joe Biden’s poll numbers have been pretty dismal in recent weeks. Additionally, the Democratic Party unexpectedly lost the Virginia gubernatorial race in November and is trailing in several polls for the upcoming congressional elections that will decide which party will control the House and Senate.
There are many reasons for the party’s problems, with high inflation and high gas prices being the main problems. But in the opinion of many (including political pundit James Carville), the party’s image of being too “woke” and “politically correct” is one of its major problems. That image was reinforced last year when the Justice Department decided to solicit information about “threats” made by parents who disagree with the leftist policies of their children’s school districts.
If the Biden administration kills Truth Social ahead of its launch with heavy-handed tactics on a relatively technical issue, many swing voters are likely to view the move as politically correct, high-handed, and undemocratic. As a result, such a move could significantly harm the Democratic Party.
The SEC generally shows leniency
Two recent examples of this point are Nicholas (NASDAQ:NKLA) and lucky coffee (OTCMTKS:LKNCY). Both companies were caught in the act of doing what many have described as fraudulent.
Nikola’s actions, which the SEC recently called “misleading,” ran from approximately November 2019 to September 2020. Yet the settlement was only announced last month and the company’s penalty amounted to a $125 million fine.
Luckin’s fraud was exposed in early 2020 and settled in December of the same year. Under the settlement, he agreed to permanent injunctions and a $180 million fine.
Shares of neither company have been withdrawn from public markets in the United States. Both cases took several months to settle. And it’s hard to argue that what Digital World and Trump Media are accused of doing is worse than what Luckin and Nikola did.
Many other SPAC agreements were probably discussed illegally
As the financial crisis of 2008 has shown, as well as numerous cases of insider trading and financial manipulation over the years, not all Wall Street figures abide by all the laws, let alone all the rules, to the letter.
And holding merger talks before we’re supposed to isn’t exactly a Bernie Madoff-level crime or even nearly as bad as, say, collusion to manipulate LIBOR prices, like a number of large banks have been doing this for many years.
Therefore, I think there’s a good chance that even though Digital World and Trump Media held merger talks before they were supposed to, many other companies did as well.
And if that’s the case, and the SEC takes tough action against Digital World, the agency could soon be inundated with whistleblowers and competitors complaining about similar past actions by other SPACs. For a variety of reasons, including a desire to avoid infuriating many SPAC investors, I don’t think the agency will want to open this Pandora’s box.
The SEC won’t want to hurt the SPAC market
An SEC crackdown on Digital World would also likely have a huge chilling effect on future SPAC deals. Following extremely harsh punitive actions against Digital World, other companies and bankers may decide that the SEC has started to get very strict on the rules surrounding SPAC agreements. As a result, many companies and banks could avoid such transactions, making them much less common.
I think such a scenario would upset many bankers, investors and companies, which the SEC probably wants to avoid.
The Basics of DWAC Stocks
There is a significant risk that the US government will try to put Trump Media out of business. But for the reasons I’ve outlined, I don’t expect Washington to achieve that goal by blocking the merger between Digital World and Trump Media.
Additionally, I expect Truth Social’s debut to take place in Q1, while the merger actually takes place. Accordingly, I am very optimistic about the medium-term outlook for DWAC stock.
As of the date of publication, Larry Ramer has held long positions at DWAC and LKNCY.
Larry has researched and written about US stocks for 14 years. He was employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks are Solar stocks, Roku, Plug Power, Ford and Snap. You can reach him on StockTwits at @larryramer. Larry started writing columns for InvestorPlace in 2015.