Hiltzik: Trump and PSPCs, made for each other

For a while there, it looked like the PSPC boom had run out of steam. Then came Donald Trump.

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Let’s start with first principles. SPACs, or Special Purpose Acquisition Companies, are shell companies that raise money from investors in the hope that they will find a private company to merge into within a given time frame, usually 24 months.

It is never a good idea to invest in a SPAC just because someone celebrating is sponsoring or investing in it or saying it is a good investment.

Security and Trade Commission

The problem is, PSPC doesn’t have a target in mind at the start, so these are the blindest pools of the blinds.

The SPAC boom built up through 2020 and through the first quarter of this year, peaking at some 300 transactions in that quarter alone.

Many were associated with big names in sports and entertainment such as Shaquille O’Neal and Jay-Z, or with political and business figures such as Paul Ryan and Sam Zell, the former owner of The Times.

By the middle of the year, the thrill seemed over. Since the end of the first quarter, only 300 more PSPCs have entered the market, according to SPAC Research.

More importantly, investors are withdrawing their money from SPACs at an increasing rate. In the PSPC model, investors can bail out or “buy back” their investments, once a target has been identified. The average repayment rate in the last quarter exceeded 50%, compared to 10% at the start of the year. This is a sign that investors are increasingly skeptical of the returns from PSPC mergers.

Enter Trump. On October 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 company that aims to challenge what it calls the “technology monopoly” in the media, which it says aims to silence conservative voices like Trump’s.

Although Trump Media has not released a discernible financial plan or explained how it intends to go about it, interest in Digital World has grown stratospheric, with its shares rising from around $ 10 (the standard IPO price for PSPCs before the merger) to $ 175 in the two days after the announcement.

Since then, Trump Media has missed a self-imposed November deadline to launch a beta of Truth Social, a social media platform that is said to 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 by a tidal wave of trolls expressing anything but admiration for Trump.

On December 6, Trump’s company revealed that it had hired a chief executive: Rep. Devin Nunes (R-Tulare), who will be leaving Congress to take the job, regardless of whether he has never run a business. media before, but he has shown assiduous devotion over the years to Trump.

Nunes did not explain his decision to leave Congress, although it is reasonable to assume it has something to do with the prospect of his district becoming more Democratic in the ongoing redistribution.

The Trump SPAC deal caught the attention of Senator Elizabeth Warren (D-Mass.), Who has dedicated her career to unmasking financial thugs. In a Nov. 17 letter to Securities and Exchange Commission chairman Gary Gensler, Warren used the deal to point out that PSPCs are insufficiently regulated.

The deal, Warren said, appears to be “a classic example of a PSPC 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 constant claims that it had not “engaged in substantive discussions, directly or indirectly, with a target business combination. “. Under federal law, Warren noted, these discussions had to be made public.

Warren also expressed concern that “DWAC’s acquisition of Trump Media and Technology could revive the market” for SPACs. This is troubling, she said, given the signs that SPACs tend to disadvantage small investors over developers.

As it turns out, the PSPC market has been showing modest signs of life lately, starting around the time of DWAC’s announcement of Trump.

Many investors who may have been drawn to Digital World by the magic of Trump’s name as it is, may have already given them their heads as stocks have gone from their high of $ 175 to 50. , $ 49 at the Monday close.

This has reinforced the impression that PSPCs are made to fatten the portfolios of promoters and their fellow insiders at the expense of gullible small investors, especially when they have little else for them than a name. celebrity.

“These new PSPCs are looking more and more like a joke for the super-rich and a way for celebrities to monetize their reputation,” CNBC stock market guru Jim Cramer told listeners in March. “Believe me, you don’t want to invest in someone else’s joke.”

Cramer seconded the SEC, which issued an investor alert at around the same time, warning, “It is never a good idea to invest in a PSPC just because someone celebrating is sponsoring or investing in it or says it’s a good investment. “

As I reported in March during the frenzy, the PSPC system hid many pitfalls for reckless small investors, who may have been drawn to the idea that PSPCs allowed the hidden gems of private businesses to go. be made public at a lower cost than through an initial public offering.

“The costs built into the PSPC structure are subtle, opaque, and far higher than previously recognized,” Stanford law professors Michael Klausner and New York University Michael Ohlrogge reported in a November article. 2020. (Their article was titled “A Look Sober at PSPC.”)

In other words, for investors and startups alike, PSPCs aren’t presenting anything new under the sun. They just look new.

So what about this deal with Trump? It didn’t last more than a few days before raising financial regulators’ eyebrows. As Digital World revealed on December 6, it received an investigation in late October from the Financial Industry Regulatory Authority, or FINRA, a Wall Street self-regulatory body, into suspicious transactions in its shares prior to the announcement.

The disclosure says that in early November, the SEC requested information on “certain … communications between DWAC and TMTG”, among others. Neither the FIRA nor the SEC have said wrongdoing has been established so far.

As for Trump Media & Technology Group, it’s not what you would call a solidly established business enterprise. The Digital World investor presentation filed with the SEC on December 6 is devoid of commercial information. It is heavily devoted to Trumpian grunts about “technology monopoly censorship” and clear assertions about the firm’s “market opportunities”.

The latter is valued at 457 million potential users generating $ 35 billion in annual revenue. Trump referred to those numbers by adding up the market reach and revenues of Netflix, Twitter, and radio and podcast company iHeartMedia.

A few other aspects of the presentation are sure to put a smile on your face. He calculates Trump’s “historical social media tracking” at 146 million, although the figure is the sum of his Instagram, Facebook and Twitter followers, which may overlap, and although his current Twitter following is nil because he has been banned from the platform.

The slideshow lists 30 executives and other members of Trump Media’s “tech team”, presumably to reinforce the idea that this is a serious tech company.

But team members are only identified by their first names and the initials of their last names, meaning “Josh A.” and “Tom M.”, like the peripheral characters of a 19th century Russian novel. Bridge notes, “Staff subject to change,” so if you were to base your investment on, say, “Steve E.” as VP, Engineering, you might be disappointed.

The entire bridge is attributed to the firm EF Hutton. This is not your father’s or grandfather’s EF Hutton, the brokerage house famous for its ‘When EF Hutton talks, people listen’ advertising campaign from the 1960s. That EF Hutton was absorbed by Shearson Lehman Bros. (remember?) in 1988 after a huge fraud scandal and was owned by American Express and Citigroup during a series of mergers.

The brand name was obviously controlled by a certain Stanley Hutton Rumbough, grandson of the original Edward Francis Hutton, who sold it to Kingswood Capital Markets, an investment bank, which rebranded itself to reflect ” rich history, successful legacy and long recognized value “. from the old name, regardless of the fraud scandal. Either way, Kingswood appears to be the investment bank associated with Trump Media.

There’s not much more to say about this PSPC deal, at least until Trump and his new CEO do something media-type. The deal followed the SPAC model to the point of arranging a $ 1 billion cash injection from outside investors known as PIPE, for “private investment in public stocks.”

PIPE investors appear to be getting a good deal in that they are assured of buying shares of the merged company at a price significantly lower than the public price for the shares. This almost certainly ensures that they will be able to monetize their actions when the merged company goes public. In the estimation of Bloomberg financial columnist Matt Levine, the goal is indistinguishable from encouraging them to find “retail rubes” to tax stocks.

This is especially true in light of the fact that Trump Media has yet to demonstrate that this is a real business. What he has is a business pitch derived from Trump’s epic resentments, a CEO with no apparent experience, and a management team that cannot be identified.

It’s also named after Trump, known in the past to lure investors and lenders to a so-called bankrupt university, casino, and other vodka and steak businesses. To anyone who wants to play in this sandbox, one can only say, “Good luck suckers.”

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