President Donald Trump announced in December that his Truth Social platform, owned by Trump Media & Technology, would launch in the first quarter, and then Reuters reported that Truth Social would debut in February. In the wake of the latter report, Digital World Acquisition Corp (NASDAQ:DWAC) stock rocketed higher.
In fact, DWAC stock jumped from its Jan. 5 closing price of $50.37 to a peak of $86.31 on Jan. 18. The shares subsequently tumbled to around $73.
Of course, the stock market’s retreat during that period played an important role in Digital World’s decline. But I believe that speculation about the SEC blocking the merger also played a role in the downturn.
According to the proponents of this theory, the SEC is likely to block the merger between Digital World and Trump Media. In violation of the agency’s rules, Trump Media executives discussed a potential merger with Digital World before the special purpose acquisition company launched its IPO.
Worth noting is that Digital World announced in December that the SEC and Financial Industry Regulatory Authority had been investigating the issue in November.
Here are four reasons why I don’t expect the SEC to block the merger.
A Veto Would Be Bad Politics
As is well-known, President Joe Biden’s poll numbers have been pretty dismal in recent weeks. Moreover, the Democratic Party unexpectedly lost the Virginia gubernatorial race in November and is trailing in several polls for the upcoming congressional elections that will decide which party will control the House and Senate.
There are many reasons for the party’s problems, with elevated inflation and high gas prices being the top issues. But in the view of many people (including political expert James Carville), the party’s image of being overly “woke” and “politically correct” is one of its major problems. That image was enhanced last year when the Justice Department decided to solicit information on “threats” made by parents who disagree with the left-wing policies of their children’s school districts.
If the Biden administration kills Truth Social before its launched with heavy-handed tactics over a relatively technical issue, many swing voters are likely to view the move as politically correct, authoritarian, and anti-democratic. As a result, such a move could significantly hurt the Democratic Party.
The SEC Usually Shows Leniency
Nikola’s actions, which the SEC recently described as “misleading,” took place from November 2019 until about September 2020. Yet the settlement was just announced last month, and the company’s penalty amounted to a fine of $125 million.
Luckin’s fraud was exposed in early 2020 and settled in December of that year. Under the settlement, it agreed to permanent injunctions and a $180 million penalty.
Neither company’s stock was taken off of public exchanges in the U.S. Both cases took many months to settle. And it’s hard to argue that what Digital World and Trump Media are accused of doing is worse than what Luckin and Nikola did.
Many Other SPAC Deals Probably Were Discussed Illegally
As the 2008 financial crisis, along with numerous insider trading and financial manipulation cases over the years have shown, not every prominent person on Wall Street follows every law, let alone every rule, to the letter.
And holding merger talks before one is supposed to do so is not exactly a Bernie Madoff-level crime or even nearly as bad, say, as colluding to manipulate LIBOR prices, as a number of large banks did for many years.
Therefore, I think there’s a good chance that, even if Digital World and Trump Media held merger talks before they were supposed to do so, many other companies did as well.
And if that’s the case, and the SEC takes harsh actions against Digital World, the agency could soon be flooded with whistleblowers and competitors complaining about similar, prior actions by other SPACs. For a variety of reasons, including a desire to avoid infuriating many SPAC investors, I don’t think that the agency will want to open that can of worms.
The SEC Will Not Want to Hurt the SPAC Market
An SEC crackdown on Digital World would also probably have a tremendous, chilling effect on future SPAC deals. In the wake of extremely harsh, punitive actions against Digital World, other companies and bankers could decide that the SEC has started to get very strict about the rules surrounding SPAC deals. As a result, many firms and banks could avoid such deals, making them much less prevalent.
I think that such a scenario would make many bankers, investors, and companies upset, something that the SEC probably wants to avoid.
The Bottom Line on DWAC Stock
There’s a significant risk that the U.S. government will attempt to put Trump Media out of business. But for the reasons I’ve outlined, I don’t expect Washington to accomplish that goal by blocking the merger between Digital World and Trump Media.
Further, I anticipate that the debut of Truth Social will occur in Q1, while the merger will indeed take place. As a result, I’m very bullish on the medium-term outlook of DWAC stock.
On the date of publication, Larry Ramer held long positions in DWAC and LKNCY.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power, Ford, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.