By Stan Choe, AP Business Writer
Donald Trump’s Truth Social network's debut on Wall Street could give him stock worth billions of dollars on paper. However, he may not be able to immediately cash it out, unless some things change.
The future of the business is uncertain. Trump’s company has said it expects to keep losing money for a while, and at least one expert says it’s probably worth less than the stock market suggests.
Trump’s return to Wall Street depends on a vote on Friday by shareholders of Digital World Acquisition Corp., which is currently just a pile of cash. The corporation hopes to merge with Trump Media & Technology Group, the company behind Truth Social that goes by TMTG. If the shareholders approve the deal, TMTG could soon see its stock trading on the Nasdaq in Digital World’s place.
Here’s a look at the proposal and Trump’s role in it.
WHAT HAPPENS FRIDAY?
Shareholders of Digital World will vote on whether to approve a merger with TMTG, where Trump is the chairman. Digital World is what’s called a special purpose acquisition company, or SPAC, or “blank-check company.”
SPACs raise cash and then look for companies to merge with. Such deals give the target companies a potentially quicker and easier way to get their stocks onto the New York Stock Exchange or Nasdaq. The arrangement lets them avoid some of the paperwork associated with traditional initial public offerings of stock, or IPOs.
For investors, SPACs offer a way to get into hyped, potentially faster-growing companies such as TMTG, the DraftKings betting service or SoFi banking.
DO SHAREHOLDERS EVER SAY NO?
It happens, but only rarely. This vote looks likely to pass given how high Digital World’s stock has jumped on excitement about Trump. It was trading Thursday above $40 per share. It’s already up roughly 140% so far this year, towering over the 10% gain for the S&P 500 index.
Many of Digital World’s investors are small-time investors who are either fans of Trump or trying to cash in on the mania, instead of big institutional and professional investors.
WHAT HAPPENS IF THE SHAREHOLDERS APPROVE?
Digital World will merge with TMTG. The stock will continue to trade under Digital World’s ticker, DWAC, possibly for a couple of days to a couple of weeks, experts say. Then at some point, companies in SPAC deals usually announce that their stock will begin trading under the new ticker symbol.
Trump’s company hopes to trade under the ticker symbol DJT, the former president’s initials. The same ticker symbol was used by Trump Hotels & Casino Resorts before it filed for Chapter 11 bankruptcy protection in 2004.
HOW MUCH WILL TRUMP GET?
Trump will own most of the new, combined company, or nearly 78.8 million shares, which would account for at least 58%. Multiply that by Digital World’s current stock price of more than $40, and the total value could surpass $3 billion.
Does Trump need money and can he sell immediately?
Trump is facing a $454 million judgment in a fraud lawsuit and other financial problems. However, he is unable to easily sell for at least six months. This is due to a “lock-up” provision which prevents major TMTG shareholders from immediately selling their shares, as it is a common restriction on Wall Street to prevent a sudden drop in the stock’s price.
Investors involved in the lock-up deal cannot sell, lend, donate, or use their shares as collateral for six months after the deal. Legal experts believe that the term “encumber” could stop Trump from using the stock to raise money before six months have passed.
There are some exceptions, such as transferring stock to immediate family members. However, in such cases, the recipients would also need to agree to the lock-up agreement.
So, Trump can definitely not get cash right away?
Digital World could waive the lock-up agreement before the deal closes. Alternatively, the new company’s board could decide to change the lock-up agreement after the deal closes, according to some legal experts.
Such a decision by the board could lead to legal scrutiny. They would need to demonstrate that they are doing it for the benefit of shareholders.
If the success of the company is heavily reliant on the value of Trump’s brand, easing the lock-up agreements could support a case that may at least prevent board members’ lawyers from being immediately dismissed by the court.
In the past, some companies’ boards have modified lock-up agreements to allow earlier selling by investors.
Who will be on the company's board?
Primarily individuals proposed by TMTG, including Donald Trump Jr., if everything goes as planned. Former Republican Rep. Devin Nunes would also be a director and the company’s CEO.
Additionally, the board would include Robert Lighthizer, who served as Trump’s U.S. trade representative, and Linda McMahon, who oversaw the Small Business Administration under Trump.
Is this a secure investment?
Every stock carries risks. Digital World has submitted 84 pages with U.S. regulators outlining its risks and those of TMTG.
As one risk, the company stated that as a controlling stockholder, Trump would have the right to vote his shares in his own interest, which may not always align with the interests of all shareholders.
It also mentioned the high failure rate for new social media platforms and TMTG’s anticipation of sustained financial losses. The company incurred a $49 million loss in the first nine months of the previous year, generating just $3.4 million in revenue and paying $37.7 million in interest expenses.
“It’s losing money, there’s no way the company is worth anything like” what the stock price suggests, said Jay Ritter, an IPO specialist at the University of Florida’s Warrington College of Business.
Regarding the stock price being significantly higher than the fundamental value, a similar issue arose with meme stocks, according to Jay Ritter. With AMC and GameStop, the share prices soared far beyond what professionals considered rational. “With AMC and GameStop, the price was way above fundamental value, and there’s the question of: Can you get out before the music stops?”
