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Nov 18, 2021 - Economy & Business

Trump deal could spark SPAC crackdown

Dan Primack
A silhouette of President Donald Trump

Illustration: Aïda Amer/Axios

Donald Trump was president when SPACs stopped being a cottage industry and instead became Wall Street waterfront. Now he might be indirectly responsible for reining in some SPAC excesses.

Driving the news: Sen. Elizabeth Warren (D-Mass.) Wednesday sent a letter to Securities and Exchange Commission chair Gary Gensler, asking his agency to investigate the proposed merger between Trump's amoebic social media company and a SPAC called Digital World Acquisition Corp.

  • She’s particularly interested in a NY Times report that Digital World’s chair and CEO Patrick Orlando held talks with Trump before the SPAC filed for its IPO in May or priced it in September. Those discussions apparently were related to a proposal that Axios scooped in April.
  • SPAC sponsors are not allowed to source potential merger targets prior to the SPAC going public, and DWAC made multiple representations in its IPO filings that its executives had followed the rules.
  • DWAC, currently valued at nearly $2 billion, may try to argue that DWAC didn't exist when Orlando talked with Trump, thus it couldn't have done anything untoward. But that may be a tough legal hill to climb, since Orlando did have other active SPACs (particularly if there's any paper trail linking the Trump opportunity to DWAC's creation).

What DWAC is alleged to have done is not unusual in SPAC-land. In fact, it's the industry's dirty little secret that many SPAC sponsors, particularly serial ones like Orlando, source deals before they're technically supposed to.

  • Securities regulators so far have turned a blind eye to the practice, which corrupts the legitimacy of being a blank check company.

The bottom line: Warren's letter, and the NY Times investigation on which it's based, may shine a spotlight that's impossible for the SEC to ignore. And if there is a crackdown, it could impact lots of SPACs that have nothing to do with Donald Trump or his social media dreams.

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