Elon Musk’s Twitter Takeover Is Only Part of Trump’s SPAC Woes

Short seller Kerrisdale Capital argues that the SEC is a bigger impediment to the former president’s media company.

Tristan Wheelock/Bllomberg

Tristan Wheelock/Bllomberg

Elon Musk’s deal to take over Twitter is causing a fair amount of handwringing on the social media platform, but it’s Donald Trump’s fledgling media company that is really taking a beating.

Since Musk floated the notion of buying Twitter, the fortunes of Twitter and Trump Media and Technology Group — which last fall announced plans to merge with Digital World Acceptance Corp., a special purpose acquisition company — have diverged widely. Musk’s bid for Twitter at $54.26 per share would be a 38 percent premium to its closing price on April 1, the day before he announced his stake. The stock of Digital World has fallen about 25 percent since that time.

Some Twitter users appear worried that Trump, who was permanently banned from Twitter after the January 6 insurrection at the Capitol, will be allowed to return under Musk’s ownership. But the former president seems more concerned about shoring up his SPAC’s flagging fortunes, saying he won’t rejoin Twitter if allowed. Instead he told Fox that he will soon join his own fledgling platform, Truth Social, whose parent is Trump Media.

Just don’t hold your breath for the SPAC merger to happen. Even before Musk’s Twitter play, the proposed deal, which is under investigation by the Securities and Exchange Commission and FINRA, was already so troubled that it had become the favorite SPAC target of short sellers.

Last week, Sahm Adrangi’s Kerrisdale Capital hedge fund put out a short report on Digital World, arguing that Musk’s Twitter purchase may be the least of the SPAC’s worries and suggesting that Trump Media will never get the regulatory approval for the merger. Since Adrangi revealed his report on April 20, the stock has fallen about 15 percent.

Calling Digital World “the poster child for some of the worst abuses the investment vehicle has spawned,” Kerrisdale claimed that the stock has further to fall given “misleading statements in [the SPAC’s registration, the status of [Trump Media’s] operations at the time the merger agreement was executed, the cast of characters seeking to consummate that merger, and those individuals’ flagrant disregard for SEC rules and regulations.”

Several observers in the SPAC community and even those close to the SEC have expressed skepticism that the deal will be killed, in part because some of its alleged abuses — like possibly clinching the deal before the IPO and not disclosing that material fact — are not uncommon and, while illegal, are hard to prove. Others argue that stopping Trump’s SPAC deal would create a political firestorm that the SEC may prefer to avoid.

But Kerrisdale offered some intriguing arguments. Its report noted that by late October, FINRA had already begun an investigation into suspiciously timed trading in Digital World’s shares. By November, the company “had received a request from SEC for, among other things, documents regarding [Digital World] board meetings, trading policies, investors’ identities, and documents and communications between” the SPAC and Trump’s fledgling social media company. Digital World disclosed these probes in December.

The report added that “a prime actor in this affair is an obscure Chinese investment firm, ARC Group, that has been repeatedly punished by the SEC for lying about the true nature of businesses that turned out to be shell companies.”

“Investors should abandon the fantasy that [Digital World’s] problems can be easily remedied with amended disclosures and a nominal fine,” Kerrisdale’s report said. “Contrary to the uninformed views of bulls, the SEC does have the ability to effectively kill the proposed merger, using, ironically, the same mechanism it used to kill three of ARC Group’s companies just five years ago.”

When the Digital World deal was announced, the Trump media company was a shell company itself, with no executives, no revenues, and no projections. Since then, several execs have come and gone, and the rollout of Truth Social has been beset with problems, including what Kerrisdale referred to as “a catalogue of technology mistakes.”

After the proposed merger was announced last October, Shares of Digital World soared as high as $175 per share, from the IPO price of $10. Most of the original SPAC investors fled, and retail buyers swarmed into the stock. But even though it been falling almost ever since then, and has become the largest SPAC short in the market, short sellers have had a tough time profiting on it — largely because the borrowing costs are extremely high.

S3 Partners’ managing director of predictive analytics Ihor Dusaniwsky told Institutional Investor that while the shorts are up $44.9 million on a marked to market basis this year — or more than 16 percent — stock borrowing costs of $77.8 million, or 28 percent. This means the shorts are in the red by almost 12 percent, including their financing costs.

However, that is starting to change. So far in April, Digital World’s shorts are up $95.3 million, a 56 percent gain for the month.

“Short sellers are getting closer to being profitable for the year with its recent stock slide,” Dusaniwsky said.