SEC Settles Fraud Charges Against Digital World Acquisition Corporation
The Securities and Exchange Commission (SEC) recently announced that it has settled fraud charges against Digital World Acquisition Corporation (DWAC), a special purpose acquisition company (SPAC). The charges stem from DWAC’s material misrepresentations made in forms filed with the SEC as part of its initial public offering (IPO) and proposed merger with Trump Media & Technology Group Corp. (TMTG).
According to the SEC’s findings, DWAC misled investors and the SEC by failing to disclose that it had formulated a plan to acquire and was actively pursuing the acquisition of TMTG prior to its IPO. The purpose of a SPAC is to identify and acquire an operating business, and as such, transparency in the steps taken by a SPAC regarding a particular acquisition is crucial to investors.
The SEC’s order states that DWAC filed an amended Form S-1 in support of its IPO in early September 2021, which claimed that neither DWAC nor its officers and directors had any discussions with potential target companies before the IPO. However, it was revealed that DWAC’s CEO and Board Chairman, along with other individuals involved with DWAC, had extensive discussions about a potential SPAC merger with TMTG dating back to February 2021. Furthermore, the SEC found that DWAC’s CEO and Chairman had created a plan in the spring and summer of 2021 to potentially use DWAC to pursue a merger with TMTG and used this plan to solicit certain pre-IPO investors. The order also notes that DWAC failed to disclose a potential conflict of interest stemming from an agreement the CEO had signed with TMTG. As a result, DWAC’s amended Form S-1 was deemed materially false and misleading.
Additionally, the SEC’s order reveals that DWAC mischaracterized and omitted information about the history of its interactions with TMTG in a later Form S-4 filed with the Commission after the announcement of the proposed merger.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, expressed concerns about these disclosure failures, particularly in the context of a SPAC, which is a “blank-check” entity without business operations. Investors heavily rely on factors such as the SPAC’s management team and potential merger targets when making financial decisions.
As a result of the SEC’s investigation, DWAC has agreed to a cease-and-desist order and to pay an $18 million penalty in the event that it closes a merger transaction. The company has also committed to ensuring that any future amended Form S-4 filed by DWAC will be materially complete, accurate, and consistent with the findings in the SEC’s order.
The SEC’s investigation was carried out by the Market Abuse Unit’s Andrew McFall, David Bennett, and Darren Boerner, as well as Lindsay S. Moilanen of the New York Regional Office. The case was supervised by Joseph Sansone of the Market Abuse Unit and Thomas P. Smith, Jr. of the New York Regional Office.