The U.S. Securities and Exchange Commission (SEC) announced that it has settled fraud charges against Digital World Acquisition Corporation (DWAC), a special purpose acquisition company (SPAC). The charges were related to material misrepresentations in forms filed with the SEC as part of DWAC’s initial public offering (IPO) and proposed merger with Trump Media & Technology Group Corp. (TMTG).

Trump Media & Technology Group (TMTG), also known as T Media Tech LLC, is a media and technology corporation headquartered in the United States. Donald Trump, the former U.S. president, established the company in 2021. TMTG announced a merger agreement with Digital World Acquisition Corp. (DWAC), a publicly traded company specializing in acquisitions, in October 2021. As of March 2023, the merger had not yet been completed.

The SEC found that DWAC misled investors and the SEC by failing to disclose that it had formulated a plan to acquire and was pursuing the acquisition of TMTG prior to DWAC’s IPO. This information is crucial to investors as the purpose of a SPAC is to identify and acquire an operating business.

According to the SEC’s order, DWAC filed an amended Form S-1 in support of its IPO in early September 2021. The form stated that neither DWAC nor its officers and directors had had any discussions with any potential target companies prior to the IPO. However, the SEC’s order revealed that dating back to February 2021, an individual who would later become DWAC’s CEO and Board Chairman, along with others involved with DWAC, had extensive SPAC merger discussions with TMTG.

The SEC’s order also found that DWAC’s CEO and Chairman initially pursued these discussions with TMTG on behalf of another SPAC. In the spring and summer of 2021, he created a plan to potentially use DWAC to pursue a merger with TMTG and used this plan to solicit certain pre-IPO investors. DWAC failed to disclose that the CEO had a potential conflict of interest based on an agreement he had signed with TMTG. As a result, DWAC’s amended Form S-1 was materially false and misleading.

The SEC’s order further states that in a later Form S-4 filed with the Commission following the announcement of the proposed merger with TMTG, DWAC mischaracterized and omitted information about the history of its interactions with TMTG.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated, “DWAC failed to disclose its discussions with TMTG and failed to disclose a material conflict of interest of its CEO and Chairman. In the context of a SPAC – a ‘blank-check’ entity without business operations – these disclosure failures are particularly problematic because investors focus on factors such as the SPAC’s management team and potential merger targets when making financial decisions.”

The SEC’s order finds that DWAC violated the antifraud provisions of the federal securities laws. DWAC agreed to a cease-and-desist order and to pay an $18 million penalty in the event it closes a merger transaction. It also agreed to undertake that, should DWAC file an amended Form S-4, any such Form S-4 will be materially complete and accurate and consistent with the findings in the SEC’s order.

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