Column: Trump's latest deal could set a high water mark for investment scams
Michael Hiltzik
Tue, December 14, 2021
Donald Trump in 2019. (Associated Press)
For a while there, it seemed that the SPAC boom had run out its string. Then came Donald Trump.
Already confused?
Let's start with first principles. SPACs, or special purpose acquisition companies, are shell companies that collect funds from investors on the expectation that they'll find a private company to merge into within a given period of time, usually 24 months.
It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.
Securities and Exchange Commission
The wrinkle is that the SPAC doesn't have a target in mind at the outset, so these are the blindest of blind pools.
The SPAC boom built through 2020 and through the first quarter of this year, peaking at some 300 deals in that quarter alone.
Many were associated with big names in sports and entertainment such as Shaquille O'Neal and Jay-Z, or political and business luminaries such as Paul Ryan and Sam Zell, the onetime owner of The Times.
By mid-year, the thrill appeared to be over. Since the end of the first quarter, only about 300 more SPACs have come to market, according to SPAC Research.
More saliently, investors have been pulling their money out of SPACs at an increasingly high rate. In the SPAC model, investors can bail, or "redeem" their investments, once a target has been identified. The average redemption rate in the latest quarter exceeded 50%, up from 10% at the start of the year. That's a sign that investors are growing more skeptical of their returns from SPAC mergers.
Enter Trump. On Oct. 20, a SPAC named Digital World Acquisition Corp. announced that it had found a merger target in Trump Media & Technology Group. Trump Media claims to be a business that aims to challenge what it calls the "tech monopoly" in media, which it asserts aims to silence conservative voices, like Trump's.
Despite Trump Media not having issued a discernible financial plan or explained how it intends to go about this task, interest in Digital World went stratospheric, with its shares soaring from about $10 (the standard IPO price for pre-merger SPACs), to $175 in the two days after the announcement.
Since then, Trump Media has missed a self-imposed deadline of November to launch a beta version of Truth Social, a social media platform that would supposedly be an alternative to Twitter (which has banned Trump). The world is still waiting. The problem may have been that a very early iteration of the site was compromised into oblivion by a tidal wave of trolls expressing anything but admiration for Trump.
On Dec. 6, Trump's company did disclose that it has hired a chief executive: Rep. Devin Nunes (R-Tulare), who will quit Congress to take the job, never mind that he has never run a media company before, but he has shown a sedulous devotion over the years to Trump.
Nunes hasn't explained his decision to leave Congress, though it's reasonable to assume that it has something to do with the prospect that his district will become more Democratic in the pending redistricting.
The Trump SPAC deal has attracted the attention of Sen. Elizabeth Warren (D-Mass.), who has devoted her career to outing financial phonies. In a Nov. 17 letter to Securities and Exchange Commission Chair Gary Gensler, Warren used the deal to underscore that SPACs are inadequately regulated.
The deal, Warren said, appears to be "a textbook example of a SPAC misleading shareholders and the public about materially important information."
She was referring to alleged undisclosed contacts between DWAC and Trump associates, which contradicted DWAC's consistent claims that it had not "initiated substantive discussions, directly or indirectly, with any business combination target." Under federal law, Warren observed, those discussions were required to be publicly disclosed.
Warren also expressed concern that "DWAC’s acquisition of Trump Media and Technology may reignite the market" for SPACs. That's troubling, she indicated, given signs that SPACs have a tendency to disadvantage small investors compared to promoters.
As it happens, the SPAC market has shown modest signs of life lately, starting around the time of the DWAC announcement about Trump.
Many investors who may have been enticed into Digital World by the magic of Trump's name, such as it is, may have already had their heads handed to them, as the shares have fallen from their peak of $175 to $50.49 at Monday's close.
That has reinforced the impression that SPACs are made to fatten the wallets of promoters and their insider friends at the expense of credulous small investors, especially when they have little going for them other than a celebrity name.
"These newer SPACs increasingly feel like an inside joke for the super-rich and a way for celebrities to monetize their reputations,” Jim Cramer, the stock trading guru at CNBC, told listeners in March. “Believe me, you don’t want to invest in someone else’s inside joke."
Cramer was seconding the SEC, which issued an investor alert around the same time, warning, "It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment."
As I reported in March during the frenzy, the SPAC system hid numerous pitfalls for unwary small investors, who may have been lured by the notion that SPACs enabled hidden gems among private companies to go public more cheaply than through an initial public offering.
“Costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized,” law professors Michael Klausner of Stanford and Michael Ohlrogge of New York University reported in a paper in November 2020. (Their paper was titled “A Sober Look at SPACs.”)
In other words, for investors and startups alike, SPACs present nothing new under the sun. They just look new.
So what about this Trump deal? It didn't last for more than a few days before raising eyebrows among financial regulators. As Digital World disclosed on Dec. 6, in late October it received an inquiry from the Financial Industry Regulatory Authority, or FINRA, a Wall Street self-regulatory body, about suspicious trading in its shares ahead of the announcement.
The disclosure states that in early November, the SEC asked for information about "certain ... communications between DWAC and TMTG," among many other things. Neither FIRA nor the SEC has said that any wrongdoing has been established thus far.
As for Trump Media & Technology Group, it's not what you would call a solidly established business enterprise. The investor presentation Digital World filed with the SEC on Dec. 6 is devoid of business information. It's heavily devoted to Trumpian grousing about "Tech Monopoly Censorship" and to airy claims about the enterprise's "market opportunity."
The latter is pegged at 457 million potential users generating $35 billion in annual revenue. Trump conjured up those figures by adding together the market reach and revenues of Netflix, Twitter and the radio and podcast firm iHeartMedia.
A couple of other aspects of the presentation are bound to raise smiles. It calculates Trump's "historic social media following" at 146 million, although the figure is the sum of his followers on Instagram, Facebook and Twitter, which may have overlapped, and although his current following on Twitter is zero because he's been banned from the platform.
The slide deck lists 30 executives and other members of Trump Media's "technology team," presumably to bolster the notion that it's a serious tech company.
But the team members are identified only by their first names and initials of their last names — i.e., "Josh A." and "Tom M.," like peripheral characters in a 19th century Russian novel. The deck notes, "personnel subject to change," so if you were basing your investment on, say, "Steve E." serving as VP, engineering, you may be disappointed.
The entire deck is attributed to the firm of E.F. Hutton. This isn't your father's or grandfather's E.F. Hutton, the brokerage renowned for its "When E.F. Hutton talks, people listen" ad campaign of the 1960s. That E.F. Hutton got absorbed by Shearson Lehman Bros. (remember them?) in 1988 after an enormous fraud scandal and was owned by American Express and Citigroup in the course of a series of mergers.
The brand name was evidently controlled by one Stanley Hutton Rumbough, grandson of the original Edward Francis Hutton, who ceded it to Kingswood Capital Markets, an investment bank, which rebranded itself to evoke the "rich history, successful legacy and long-recognized value" of the old name, never mind the fraud scandal. Anyway, Kingswood seems to be the investment bank associated with Trump Media.
There isn't much more to say about this SPAC deal, at least until Trump and his new CEO actually do something media-like. The deal has followed the SPAC model to the point of arranging a $1-billion cash infusion from outside investors known as a PIPE, for "private investment in public equity."
The PIPE investors appear to be getting a good deal in that they are assured of buying shares in the merged company at a steep discount to the shares' public price. That assures them almost certainly of being able to flip their shares at a profit the moment the merged company goes public. In the estimate of Bloomberg financial columnist Matt Levine, the goal is indistinguishable from encouraging them to find "some retail rubes" to foist the shares on.
That's particularly true in light of the fact that Trump Media has yet to demonstrate that it is a genuine company. What it has is a business pitch derived from Trump's epic resentments, a CEO with no apparent experience, and a management team that can't be identified.
It also has Trump's name, which has been known in the past to attract investors and lenders to a purported university, a failing casino, and other businesses hawking vodka and steaks. To anyone who wants to play in this sandbox, we can only say: "Good luck, suckers."
This story originally appeared in Los Angeles Times.
Michael Hiltzik
Tue, December 14, 2021
Donald Trump in 2019. (Associated Press)
For a while there, it seemed that the SPAC boom had run out its string. Then came Donald Trump.
Already confused?
Let's start with first principles. SPACs, or special purpose acquisition companies, are shell companies that collect funds from investors on the expectation that they'll find a private company to merge into within a given period of time, usually 24 months.
It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment.
Securities and Exchange Commission
The wrinkle is that the SPAC doesn't have a target in mind at the outset, so these are the blindest of blind pools.
The SPAC boom built through 2020 and through the first quarter of this year, peaking at some 300 deals in that quarter alone.
Many were associated with big names in sports and entertainment such as Shaquille O'Neal and Jay-Z, or political and business luminaries such as Paul Ryan and Sam Zell, the onetime owner of The Times.
By mid-year, the thrill appeared to be over. Since the end of the first quarter, only about 300 more SPACs have come to market, according to SPAC Research.
More saliently, investors have been pulling their money out of SPACs at an increasingly high rate. In the SPAC model, investors can bail, or "redeem" their investments, once a target has been identified. The average redemption rate in the latest quarter exceeded 50%, up from 10% at the start of the year. That's a sign that investors are growing more skeptical of their returns from SPAC mergers.
Enter Trump. On Oct. 20, a SPAC named Digital World Acquisition Corp. announced that it had found a merger target in Trump Media & Technology Group. Trump Media claims to be a business that aims to challenge what it calls the "tech monopoly" in media, which it asserts aims to silence conservative voices, like Trump's.
Despite Trump Media not having issued a discernible financial plan or explained how it intends to go about this task, interest in Digital World went stratospheric, with its shares soaring from about $10 (the standard IPO price for pre-merger SPACs), to $175 in the two days after the announcement.
Since then, Trump Media has missed a self-imposed deadline of November to launch a beta version of Truth Social, a social media platform that would supposedly be an alternative to Twitter (which has banned Trump). The world is still waiting. The problem may have been that a very early iteration of the site was compromised into oblivion by a tidal wave of trolls expressing anything but admiration for Trump.
On Dec. 6, Trump's company did disclose that it has hired a chief executive: Rep. Devin Nunes (R-Tulare), who will quit Congress to take the job, never mind that he has never run a media company before, but he has shown a sedulous devotion over the years to Trump.
Nunes hasn't explained his decision to leave Congress, though it's reasonable to assume that it has something to do with the prospect that his district will become more Democratic in the pending redistricting.
The Trump SPAC deal has attracted the attention of Sen. Elizabeth Warren (D-Mass.), who has devoted her career to outing financial phonies. In a Nov. 17 letter to Securities and Exchange Commission Chair Gary Gensler, Warren used the deal to underscore that SPACs are inadequately regulated.
The deal, Warren said, appears to be "a textbook example of a SPAC misleading shareholders and the public about materially important information."
She was referring to alleged undisclosed contacts between DWAC and Trump associates, which contradicted DWAC's consistent claims that it had not "initiated substantive discussions, directly or indirectly, with any business combination target." Under federal law, Warren observed, those discussions were required to be publicly disclosed.
Warren also expressed concern that "DWAC’s acquisition of Trump Media and Technology may reignite the market" for SPACs. That's troubling, she indicated, given signs that SPACs have a tendency to disadvantage small investors compared to promoters.
As it happens, the SPAC market has shown modest signs of life lately, starting around the time of the DWAC announcement about Trump.
Many investors who may have been enticed into Digital World by the magic of Trump's name, such as it is, may have already had their heads handed to them, as the shares have fallen from their peak of $175 to $50.49 at Monday's close.
That has reinforced the impression that SPACs are made to fatten the wallets of promoters and their insider friends at the expense of credulous small investors, especially when they have little going for them other than a celebrity name.
"These newer SPACs increasingly feel like an inside joke for the super-rich and a way for celebrities to monetize their reputations,” Jim Cramer, the stock trading guru at CNBC, told listeners in March. “Believe me, you don’t want to invest in someone else’s inside joke."
Cramer was seconding the SEC, which issued an investor alert around the same time, warning, "It is never a good idea to invest in a SPAC just because someone famous sponsors or invests in it or says it is a good investment."
As I reported in March during the frenzy, the SPAC system hid numerous pitfalls for unwary small investors, who may have been lured by the notion that SPACs enabled hidden gems among private companies to go public more cheaply than through an initial public offering.
“Costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized,” law professors Michael Klausner of Stanford and Michael Ohlrogge of New York University reported in a paper in November 2020. (Their paper was titled “A Sober Look at SPACs.”)
In other words, for investors and startups alike, SPACs present nothing new under the sun. They just look new.
So what about this Trump deal? It didn't last for more than a few days before raising eyebrows among financial regulators. As Digital World disclosed on Dec. 6, in late October it received an inquiry from the Financial Industry Regulatory Authority, or FINRA, a Wall Street self-regulatory body, about suspicious trading in its shares ahead of the announcement.
The disclosure states that in early November, the SEC asked for information about "certain ... communications between DWAC and TMTG," among many other things. Neither FIRA nor the SEC has said that any wrongdoing has been established thus far.
As for Trump Media & Technology Group, it's not what you would call a solidly established business enterprise. The investor presentation Digital World filed with the SEC on Dec. 6 is devoid of business information. It's heavily devoted to Trumpian grousing about "Tech Monopoly Censorship" and to airy claims about the enterprise's "market opportunity."
The latter is pegged at 457 million potential users generating $35 billion in annual revenue. Trump conjured up those figures by adding together the market reach and revenues of Netflix, Twitter and the radio and podcast firm iHeartMedia.
A couple of other aspects of the presentation are bound to raise smiles. It calculates Trump's "historic social media following" at 146 million, although the figure is the sum of his followers on Instagram, Facebook and Twitter, which may have overlapped, and although his current following on Twitter is zero because he's been banned from the platform.
The slide deck lists 30 executives and other members of Trump Media's "technology team," presumably to bolster the notion that it's a serious tech company.
But the team members are identified only by their first names and initials of their last names — i.e., "Josh A." and "Tom M.," like peripheral characters in a 19th century Russian novel. The deck notes, "personnel subject to change," so if you were basing your investment on, say, "Steve E." serving as VP, engineering, you may be disappointed.
The entire deck is attributed to the firm of E.F. Hutton. This isn't your father's or grandfather's E.F. Hutton, the brokerage renowned for its "When E.F. Hutton talks, people listen" ad campaign of the 1960s. That E.F. Hutton got absorbed by Shearson Lehman Bros. (remember them?) in 1988 after an enormous fraud scandal and was owned by American Express and Citigroup in the course of a series of mergers.
The brand name was evidently controlled by one Stanley Hutton Rumbough, grandson of the original Edward Francis Hutton, who ceded it to Kingswood Capital Markets, an investment bank, which rebranded itself to evoke the "rich history, successful legacy and long-recognized value" of the old name, never mind the fraud scandal. Anyway, Kingswood seems to be the investment bank associated with Trump Media.
There isn't much more to say about this SPAC deal, at least until Trump and his new CEO actually do something media-like. The deal has followed the SPAC model to the point of arranging a $1-billion cash infusion from outside investors known as a PIPE, for "private investment in public equity."
The PIPE investors appear to be getting a good deal in that they are assured of buying shares in the merged company at a steep discount to the shares' public price. That assures them almost certainly of being able to flip their shares at a profit the moment the merged company goes public. In the estimate of Bloomberg financial columnist Matt Levine, the goal is indistinguishable from encouraging them to find "some retail rubes" to foist the shares on.
That's particularly true in light of the fact that Trump Media has yet to demonstrate that it is a genuine company. What it has is a business pitch derived from Trump's epic resentments, a CEO with no apparent experience, and a management team that can't be identified.
It also has Trump's name, which has been known in the past to attract investors and lenders to a purported university, a failing casino, and other businesses hawking vodka and steaks. To anyone who wants to play in this sandbox, we can only say: "Good luck, suckers."
This story originally appeared in Los Angeles Times.
'This is weird and murky.' Trump SPAC deal values firm at more than $10 billion despite red flags
By Matt Egan, CNN Business
Tue December 14, 2021
New York (CNN Business)Former President Donald Trump's new media venture has no known revenue or product.
Trump Media & Technology Group (TMTG) posted an investor presentation last week that appears to contain errors and seems to have been partially copied and pasted from the internet. Bizarrely, one slide defines a user as a "sales representative who travels to visit customers," a definition that makes little sense given that this is a media company, not a sales platform.
TMTG's incoming CEO, Republican Congressman Devin Nunes, has no business experience in technology or social media. And federal regulators are investigating the deal to bring the media venture public.
Despite these red flags, TMTG is creating enormous buzz among at least some investors and has achieved an implied valuation above $10 billion, according to Renaissance Capital.
Federal regulators are investigating the Trump SPAC deal
"This is weird and murky," Matthew Tuttle, CEO of Tuttle Capital Management LLC, told CNN. "I've never seen anything like this before. And I probably never will again."
TMTG, chaired by the former president, simultaneously revealed a deal to go public through a merger with Digital World Acquisition Corp., which is a type of a shell company known as a SPAC, or a Special Purpose Acquisition Company. SPACs raise money that must be used to acquire and bring public private firms. Essentially they are blank-check firms that exist solely to find suitable merger partners.
SPACs have become very popular on Wall Street, in part because they can save time and money compared with traditional initial public offerings. Celebrities including Alex Rodriguez, Larry Kudlow and Shaquille O'Neal have gotten involved in SPACs, prompting regulators to warn investors not to invest in a SPAC just because a celebrity is involved.
Implied valuation above $11 billion
The Trump SPAC instantly set off a frenzy on Wall Street -- even though little was known about the new entity. Shares of Digital World skyrocketed as much as 1,657% in the days after the deal was announced before eventually retreating.
"This is now the meme stock of all meme stocks," said Tuttle, whose firm issues ETFs, including several that focus on the SPAC market. "Take all of the buzz going around about AMC and GameStop in January and February and multiple it by a million and that's what this is."
Based on Digital World's Monday closing price of $50.49, the SPAC deal implies a valuation on TMTG at about $10.5 billion, according to Renaissance Capital, which provides IPO-focused ETFs and pre-IPO research. That implied valuation includes warrants, private placements and a deal to raise $1 billion upon the completion of the SPAC merger.
Tuttle, who said his firm briefly owned shares in Digital World before they skyrocketed, called the valuation "somewhat frightening" and "ridiculous."
"Treat this like a gamble, because it definitely is," said Matthew Kennedy, senior IPO market strategist at Renaissance Capital. "It seems like a lot of the valuation is based on hype and the personal popularity of Donald Trump. That's not a sound investment rationale."
'It didn't really make sense'
One of the many unusual aspects of the Trump SPAC is that the parties initially released very little concrete information about the fundamentals of the business.
New documents were released last week, but they raise more questions than answers.
A 38-slide presentation filed by TMTG includes a page titled "Infrastructure" that defines a user as a "person, or organization, or system that has one or more roles that initiates or interacts with activities." It goes on to say that includes a "sales representative who travels to visit customers."
That definition is hard to reconcile with the fact that TMTG is supposed to be a conservative media company, not a platform that caters to traveling salespeople.
"It didn't really make sense," Kennedy said. "A better example of a user would be 'US residents with internet access' or 'one of the 89 million followers of Trump's former Twitter account.'"
Judd Legum, who writes the political newsletter Popular Information, flagged the definition of a "user" in a Twitter thread over the weekend. Legum pointed out that the language on the infrastructure slide is just "cut-and-pasted from other sites."
Indeed, the slide's description of database servers matches what is written on a page last updated in 2016 on Techopedia, a website that includes a tech jargon dictionary. The definition of load balancer matches what is listed on a page on the website of Citrix.
Likewise, the definition of a client matches what is found on the website of Cloudflare.
"In other words, not only does this company not have any technical infrastructure," Legum wrote, "it could not be bothered to even write its own slide of what the infrastructure will be."
TMTG did not respond to requests for comment.
'Serious errors'
But these are not the only oddities in the investor presentation.
Kennedy, the Renaissance Capital strategist, notes that slide 5 shows the PIPE (private investment in public equity) potentially converting into 13.7 million shares, even though other filings indicate the minimum is actually 29.8 million. Another line in the same slide appears to have another error about the number of shares to be held by TMTG stockholders, Kennedy said.
Another unusual element of the presentation is that slide 21 in the deck lists first names and last initials only of the members of TMTG's technology team.
"I believe they're moving very quickly to capitalize on the current share price, so that could explain some of the errors, inconsistencies and other abnormalities," Kennedy said.
TMTG is not the only company in a SPAC deal to have typos and errors in filings. Kennedy said in the last year, he's noticed more of these issues creeping into investor presentations.
"This is a bit more. It's an error regarding the valuation and very fundamental components of the deal. These are more serious errors than we normally see," he said.
Projecting just $1 million in revenue next year
The slide deck lists an array of financial projections, including that Truth Social could reach 81 million users by 2026 and generate $13.50 in average revenue per user. The presentation states that TMTG+, the planned streaming app, is projected to reach 40 million total subscribers by 2025 and generate $9 in average monthly fees per user.
"TMTG aspires to create a media powerhouse to rival the liberal media consortium and fight back against the 'Big Tech' companies of Silicon Valley, who have used their unilateral power to silence opposing voices in America," TMTG says in the presentation.
The company said TMTG+ could deliver a price point close to that of Netflix "given President Trump's highly enthused base."
Yet the presentation also concedes that the business doesn't amount to much at the moment.
One slide indicates management projects to generate just $1 million in revenue next year, based solely on Truth Social.
"This is extremely high risk. It is really buying a pig in a poke," said Jonathan Macey, a professor at Yale Law School. "But apparently a lot of people seem to believe that something can be made of this because the valuation really is soaring."
TMTG recently announced a deal to raise $1 billion upon the completion of its SPAC agreement.
However, the company did not disclose who the investors committing $1 billion are, other than to say they are a "diverse group" of institutional investors.
Renaissance's Kennedy said the terms of the $1 billion investment are "unusually favorable" to the investors, granting them preferred shares that convert to common shares at a steep discount.
SEC and FINRA are investigating
The Trump SPAC is also the subject of regulatory scrutiny.
Last week, Digital World said in a filing it received a document and information request from the Securities and Exchange Commission in early November. Among other items, Digital World said the SEC request sought documents and communications between Digital World and Trump Media and Technology Group.
Digital World also said Wall Street's self-regulator, the Financial Industry Regulatory Authority, or FINRA, is looking into trading prior to the deal's announcement.
In late October, the New York Times reported that Trump began discussing a merger with Digital World long before the blank-check company went public and before such talks were disclosed to investors.
That prompted Senator Elizabeth Warren to call for the SEC to investigate whether any laws were broken by Digital World because the company repeatedly told shareholders that it had not held substantive talks with a target company.
Devin Nunes is the new CEO
Trump's own role in the SPAC deal is unclear. The filings do not clearly indicate the former president's role, beyond describing him as the chairman of TMTG. Trump did not respond to requests for comment.
TMTG reached a deal to go public in October despite not having a CEO. That vacancy has since been filled by Nunes, the California Republican who recently announced he will leave the House to join the Trump social media firm.
Yet Nunes, a former cattle and dairy farmer, does not appear to have any business experience in social media or technology. His Congressional website says he has a bachelor's degree in agricultural business and a master's in agriculture. Nunes did not respond to requests for comment.
The fact that TMTG won't be run by an executive with a proven track record in technology or social media adds to the risky nature of the venture. Countless startups with far more experienced executives have tried and failed to crack this market.
"It's difficult to build a social media company. Even after Twitter generated hundreds of millions of users, there were doubts about the company," Kennedy said. "You can throw money at these projects, but it's hard to build a sticky platform."
By Matt Egan, CNN Business
Tue December 14, 2021
New York (CNN Business)Former President Donald Trump's new media venture has no known revenue or product.
Trump Media & Technology Group (TMTG) posted an investor presentation last week that appears to contain errors and seems to have been partially copied and pasted from the internet. Bizarrely, one slide defines a user as a "sales representative who travels to visit customers," a definition that makes little sense given that this is a media company, not a sales platform.
TMTG's incoming CEO, Republican Congressman Devin Nunes, has no business experience in technology or social media. And federal regulators are investigating the deal to bring the media venture public.
Despite these red flags, TMTG is creating enormous buzz among at least some investors and has achieved an implied valuation above $10 billion, according to Renaissance Capital.
Federal regulators are investigating the Trump SPAC deal
"This is weird and murky," Matthew Tuttle, CEO of Tuttle Capital Management LLC, told CNN. "I've never seen anything like this before. And I probably never will again."
TMTG, chaired by the former president, simultaneously revealed a deal to go public through a merger with Digital World Acquisition Corp., which is a type of a shell company known as a SPAC, or a Special Purpose Acquisition Company. SPACs raise money that must be used to acquire and bring public private firms. Essentially they are blank-check firms that exist solely to find suitable merger partners.
SPACs have become very popular on Wall Street, in part because they can save time and money compared with traditional initial public offerings. Celebrities including Alex Rodriguez, Larry Kudlow and Shaquille O'Neal have gotten involved in SPACs, prompting regulators to warn investors not to invest in a SPAC just because a celebrity is involved.
Implied valuation above $11 billion
The Trump SPAC instantly set off a frenzy on Wall Street -- even though little was known about the new entity. Shares of Digital World skyrocketed as much as 1,657% in the days after the deal was announced before eventually retreating.
"This is now the meme stock of all meme stocks," said Tuttle, whose firm issues ETFs, including several that focus on the SPAC market. "Take all of the buzz going around about AMC and GameStop in January and February and multiple it by a million and that's what this is."
Based on Digital World's Monday closing price of $50.49, the SPAC deal implies a valuation on TMTG at about $10.5 billion, according to Renaissance Capital, which provides IPO-focused ETFs and pre-IPO research. That implied valuation includes warrants, private placements and a deal to raise $1 billion upon the completion of the SPAC merger.
Tuttle, who said his firm briefly owned shares in Digital World before they skyrocketed, called the valuation "somewhat frightening" and "ridiculous."
"Treat this like a gamble, because it definitely is," said Matthew Kennedy, senior IPO market strategist at Renaissance Capital. "It seems like a lot of the valuation is based on hype and the personal popularity of Donald Trump. That's not a sound investment rationale."
'It didn't really make sense'
One of the many unusual aspects of the Trump SPAC is that the parties initially released very little concrete information about the fundamentals of the business.
New documents were released last week, but they raise more questions than answers.
A 38-slide presentation filed by TMTG includes a page titled "Infrastructure" that defines a user as a "person, or organization, or system that has one or more roles that initiates or interacts with activities." It goes on to say that includes a "sales representative who travels to visit customers."
That definition is hard to reconcile with the fact that TMTG is supposed to be a conservative media company, not a platform that caters to traveling salespeople.
"It didn't really make sense," Kennedy said. "A better example of a user would be 'US residents with internet access' or 'one of the 89 million followers of Trump's former Twitter account.'"
Judd Legum, who writes the political newsletter Popular Information, flagged the definition of a "user" in a Twitter thread over the weekend. Legum pointed out that the language on the infrastructure slide is just "cut-and-pasted from other sites."
Indeed, the slide's description of database servers matches what is written on a page last updated in 2016 on Techopedia, a website that includes a tech jargon dictionary. The definition of load balancer matches what is listed on a page on the website of Citrix.
Likewise, the definition of a client matches what is found on the website of Cloudflare.
"In other words, not only does this company not have any technical infrastructure," Legum wrote, "it could not be bothered to even write its own slide of what the infrastructure will be."
TMTG did not respond to requests for comment.
'Serious errors'
But these are not the only oddities in the investor presentation.
Kennedy, the Renaissance Capital strategist, notes that slide 5 shows the PIPE (private investment in public equity) potentially converting into 13.7 million shares, even though other filings indicate the minimum is actually 29.8 million. Another line in the same slide appears to have another error about the number of shares to be held by TMTG stockholders, Kennedy said.
Another unusual element of the presentation is that slide 21 in the deck lists first names and last initials only of the members of TMTG's technology team.
"I believe they're moving very quickly to capitalize on the current share price, so that could explain some of the errors, inconsistencies and other abnormalities," Kennedy said.
TMTG is not the only company in a SPAC deal to have typos and errors in filings. Kennedy said in the last year, he's noticed more of these issues creeping into investor presentations.
"This is a bit more. It's an error regarding the valuation and very fundamental components of the deal. These are more serious errors than we normally see," he said.
Projecting just $1 million in revenue next year
The slide deck lists an array of financial projections, including that Truth Social could reach 81 million users by 2026 and generate $13.50 in average revenue per user. The presentation states that TMTG+, the planned streaming app, is projected to reach 40 million total subscribers by 2025 and generate $9 in average monthly fees per user.
"TMTG aspires to create a media powerhouse to rival the liberal media consortium and fight back against the 'Big Tech' companies of Silicon Valley, who have used their unilateral power to silence opposing voices in America," TMTG says in the presentation.
The company said TMTG+ could deliver a price point close to that of Netflix "given President Trump's highly enthused base."
Yet the presentation also concedes that the business doesn't amount to much at the moment.
One slide indicates management projects to generate just $1 million in revenue next year, based solely on Truth Social.
"This is extremely high risk. It is really buying a pig in a poke," said Jonathan Macey, a professor at Yale Law School. "But apparently a lot of people seem to believe that something can be made of this because the valuation really is soaring."
TMTG recently announced a deal to raise $1 billion upon the completion of its SPAC agreement.
However, the company did not disclose who the investors committing $1 billion are, other than to say they are a "diverse group" of institutional investors.
Renaissance's Kennedy said the terms of the $1 billion investment are "unusually favorable" to the investors, granting them preferred shares that convert to common shares at a steep discount.
SEC and FINRA are investigating
The Trump SPAC is also the subject of regulatory scrutiny.
Last week, Digital World said in a filing it received a document and information request from the Securities and Exchange Commission in early November. Among other items, Digital World said the SEC request sought documents and communications between Digital World and Trump Media and Technology Group.
Digital World also said Wall Street's self-regulator, the Financial Industry Regulatory Authority, or FINRA, is looking into trading prior to the deal's announcement.
In late October, the New York Times reported that Trump began discussing a merger with Digital World long before the blank-check company went public and before such talks were disclosed to investors.
That prompted Senator Elizabeth Warren to call for the SEC to investigate whether any laws were broken by Digital World because the company repeatedly told shareholders that it had not held substantive talks with a target company.
Devin Nunes is the new CEO
Trump's own role in the SPAC deal is unclear. The filings do not clearly indicate the former president's role, beyond describing him as the chairman of TMTG. Trump did not respond to requests for comment.
TMTG reached a deal to go public in October despite not having a CEO. That vacancy has since been filled by Nunes, the California Republican who recently announced he will leave the House to join the Trump social media firm.
Yet Nunes, a former cattle and dairy farmer, does not appear to have any business experience in social media or technology. His Congressional website says he has a bachelor's degree in agricultural business and a master's in agriculture. Nunes did not respond to requests for comment.
The fact that TMTG won't be run by an executive with a proven track record in technology or social media adds to the risky nature of the venture. Countless startups with far more experienced executives have tried and failed to crack this market.
"It's difficult to build a social media company. Even after Twitter generated hundreds of millions of users, there were doubts about the company," Kennedy said. "You can throw money at these projects, but it's hard to build a sticky platform."
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