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NEW YORK (AP) – The Wall Street debut of Donald Trump’s Truth social network could net him stocks worth billions of dollars on paper. But unless something changes, the former president probably won’t be able to cash in on it anytime soon.
The long-term outlook for the business is highly questionable. Mr. Trump’s company expects to remain in the red for some time, and at least one expert says it is likely worth much less than the stock market indicates.
President Trump’s return to Wall Street hinges on a vote scheduled for Friday by shareholders of a company called Digital World Acquisition Corp., which for now is essentially just a pile of cash. . The company hopes to merge with Trump Media & Technology Group, which operates Truth Social, known as TMTG. If shareholders approve the deal, TMTG will soon have its shares traded on the Nasdaq instead of the Digital World.
Let’s take a look at this proposal and Trump’s role in it.
What happens on Friday?
Digital World shareholders will vote on whether to approve the merger with TMTG, which is chaired by Trump. Digital World is what’s known as a special purpose acquisition company (SPAC, or “blank check company”).
SPACs raise money and look for companies to merge with. Such transactions could provide target companies with a faster and easier way to list their shares on the New York Stock Exchange or Nasdaq. The arrangement allows companies to avoid some of the red tape associated with traditional initial public offerings (IPOs).
For investors, SPACs offer a way to tap into hyped companies with the potential for rapid growth, such as TMTG, DraftKings Betting Services, and SoFi Banking.
Will shareholders ever say no?
It happens, but very rarely. The vote seems likely to pass, given that Digital World’s stock price has soared on excitement about President Trump. Thursday’s closing price was $42.81 per share. It’s already up nearly 145% this year, outpacing the S&P 500’s gain of about 10%.
Many investors in the digital world are not large institutional or professional investors, but rather small investors who are Trump fans or are trying to make money from them.
What happens if shareholders approve?
Digital World will merge with TMTG. The stock will likely continue trading under the Digital World ticker “DWAC” for days or weeks, experts said. Then, at some point, the companies participating in the SPAC transaction typically announce that their stock will begin trading under a new ticker symbol.
Trump’s company wants to trade under the ticker symbol DJT, the former president’s initials. The same ticker symbol was used by Trump Hotels & Casino Resorts until his 2004 filing for Chapter 11 bankruptcy.
How much will Trump receive?
Mr. Trump will own the majority of the combined company, or at least 58%, or about 78.8 million shares. Multiply that by Digital World’s current stock price of more than $40, and the total value could exceed $3 billion.
Trump needs cash, right? Can he sell quickly?
Trump faces financial burdens, including a $454 million judgment in a fraud lawsuit. However, it won’t sell easily for at least six months. That’s because TMTG’s major shareholders will be subject to so-called “lock-up” provisions. This is a common Wall Street restriction that prevents large early investors from exiting their stocks too quickly. Such sales could push down stock prices.
Investors under lock-up transactions cannot sell, lend, donate, or encumber their shares for six months after the transaction closes. Legal experts say “mortgage” is a strong word that could prevent Trump from raising cash using stocks as collateral before the six-month period is up.
There are some exceptions, such as the transfer of shares to a close relative. However, in such cases, the recipient must also agree to abide by the lock-up agreement.
Are you sure you don’t have cash right away?
The Digital World may waive the lock-up agreement before the transaction is completed. Alternatively, what some legal experts say is more likely, the new company’s board could decide to modify the lock-up agreement after the deal closes.
If the board makes such a decision, these directors could be subject to legal investigation. They will need to demonstrate that they are acting in the interests of shareholders.
But if Mr. Trump’s brand value is key to the company’s success, and relaxing the lockup agreement can preserve that brand, then at least the board members’ lawyers can avoid being immediately mocked in a lawsuit. There is a possibility that it will happen.
Boards of some companies have in the past modified lock-up agreements to allow investors to sell early.
Who will serve on this company’s board of directors?
If all goes as expected, most will be people recommended by TMTG, including the former president’s son, Donald Trump Jr. Former Republican Congressman Devin Nunes will become the company’s director and CEO.
Robert Lighthizer, who served as President Trump’s U.S. trade representative, and Linda McMahon, who ran the Small Business Administration under Trump, will also join the board.
Is this a safe investment?
Every stock has risk. Digital World filed an 84-page document with U.S. regulators listing many of the risks for the company and TMTG.
One risk, the company said, is that Trump, as a controlling shareholder, has the right to vote shares in his own interests, but that may not necessarily be in the interests of all shareholders. .
It also cited the high failure rate of new social media platforms and TMTG’s expectation that the company will incur operational losses “for the foreseeable future.” The company lost $49 million in the first nine months of last year, had revenue of just $3.4 million, and had to pay $37.7 million in interest expenses.
“It’s in the red. There’s no way it’s worth what the stock price suggests,” said Jay Ritter, an IPO specialist at the University of Florida’s Warrington College of Business.
“We’re talking about the same problem here with meme stocks, given that stock prices have diverged so far from their fundamental value,” he said. He said this while remembering a company that skyrocketed. “In the case of AMC and GameStop, prices were way above their underlying value, so the question is, can they get out before the music stops?”
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