No. of Recommendations: 8
A report published by
The Guardian on April 3, 2024 expands upon details previously covered by
The Washington Post in February regarding the mechanics (people and processes) behind the IPO of Donald Trump's social media company TMTG. The
Guardian story addresses information coming to light about the source of additional funding Truth Social required while the IPO of its parent company was struggling to get past investigations by federal authorities. As one would expect with anything involving Trump, the emerging story is rife with self-dealing, fraud, a multitude of likely crimes and ties to Russia.
Before diving into specifics about the Trump deal likely did wrong, it is worthwhile to explain how the Special Purpose Acquisition Companies (SPACs) process is supposed to work and how a SPAC deal's financial goals and legal obligations differ from traditional IPOs.
The Mechanics of a SPAC Based IPOAs described in the context of the recent Trump business venture, the entire SPAC process is highly confusing and, even when accomplished legally, would seem to generate enormous conflicts of interest and numerous opportunities for fraud. To better understand the process, first forget what you think you may know about SPACs from the Trump saga and start from scratch.
A SPAC is a firm explicitly created to become publicly traded, identify some other privately held firm as an acquisition target, enter into a merger agreement with that target then transform into that other target at the point of merger, essentially taking the OTHER private company public. If it sounds like a pump and dump scheme combined with Invasion of the Body Snatchers, you are understanding the concept correctly.
As explained by advocates of the SPAC process, a SPAC is a modern equivalent of a prior strategy first popularized in the 1970s aimed at providing an alternate sequence of steps for raising capital to fund start-up companies that provide a different set of risks along that path. Advocates of SPACs believe this altered sequence and its altered risks provide a better match of business risk with financial risk in some business sectors, allowing more investment capital to flow into those sectors than would using normal IPO flows. What does that mean?
In a traditional IPO, New Company X has traditionally been operating for some period of time privately, has some sort of financial track record and it has a working product or service to show potential investors. It got to this point using earlier rounds of capital raised from investors with MUCH higher risk tolerance but the company requires orders of magnitude more capital to continue growing and that level of capital is beyond the resources of the initial investors. With the firm's established financials and track record for its products and services, a traditional IPO allows the entire investing public to review those records and its growth prospects to buy in via publicly traded shares.
When NewCo files its IPO, it shares its overall financial picture, identifies how many shares are being retained for current owners and employees and how many shares are being sold in the IPO to the public. Imagine NewCo filing for IPO with the following statistics:
* total NPV = $5,000,000,000
* total shares held by owners / employees = 25,000,000
* total shares offered in IPO = 75,000,000
* suggested IPO stock price = $45
Those numbers imply the the fair value of NewCo shares is $5 billion / 100 million = $50/share. Since the suggested IPO price is $45 dollars, an outside investor looking in might be tempted to participate in the IPO, see if they can snag any shares at $45 and quickly capture a $5 gain by unloading the shares when the market drives the price up to fair market value. If the IPO suggested price is $60, outside investors might sit on their hands and shares won't move until the price comes down and the founders may fall short of the cash they expected to raise.
The SPAC based IPO process is vastly different than the traditional flow. As explained by its advocates, the SPAC mechanism is intended to attract capital for an investment opportunity SOLELY based upon the perceived acumen of the SPAC founders, prior to those founders identifying any particular business to take public. The founders will typically focus in a particular business sector (biotech, semiconductors, AI, etc.) but legally at the time the SPAC is created, there is no target company identified.
To an investor, the choice between investing in a company via a traditional IPO versus investing in a future company via a SPAC is akin to a choice between these options:
IPO approach -- placing a $10,000 bet on the Kansas City Chiefs winning the 2024 Super Bowl on August 1, 2023 before pre-season begins, knowing the entire roster and payroll of the fully assembled team and its track record for the past few seasons
SPAC approach -- placing a $40,000 bet on the combination of Andy Reid (head coach), Clark Hunt (owner) and Brett Veach (general manager) on August 1, 2021 being able to find a team within two years capable of starting the 2023 season and winning the SuperBowl
Note those alternatives are not identical in their financial attributes or timeline. In the IPO approach, the investor is placing a direct financial bet on an existing team with a track record. Once invested, the investor owns a share of the team. If they grow unhappy with its performance, they can sell their shares at whatever the market is bearing at that time.
In the SPAC approach, virtually nothing is known about the eventual company other than it will probably play some professional sport, maybe football. The investor is betting upon the expertise of the founders to FIND a suitable company worth investing in at public scales. Because so little is known about the eventual target, demand for shares of the SPAC will likely be smaller, allowing fewer investors to buy more shares but in exchange for that risk, after the founders identify a target company, the SPAC investors have the right collectively to approve or veto the merger and IPO that would take the target public. If they veto, they not only get their $40,000 back, they might even get interest on their $40,000.
From all of that introduction and explanation, the key takeaways are these:
* By legal definition, SPAC founders cannot have a specific acquisition target identified at the time the SPAC goes public, nor can it be in communication with any targets
* By legal definition, a SPAC has a fixed window of time, typically two years, to identify an acquisition target, formulate a merger deal and win approval by the SPAC owners and the target to merge
* If an acquisition target cannot be identified and a merger closed by the end of the fixed window, the SPAC must return the capital to the SPAC owners
So what happened with the Trump SPAC Deal?
Inside the Trump SPAC DebacleIn a nutshell, the SPAC deal involving Trump Media Technology Group (TMTG) and Digital World Acquisition Corporate (DWAC) involves all of the plot elements you would expect in a Trump dinner theatre production.
* There is a failed businesses
* There is demand for large, short-term loans
* There are violations of the law
* There is fraud
* There are loans and off-shore bank accounts
* There is self-dealing
* There are Russians
Based on the reporting in
The Guardian here
https://www.theguardian.com/us-news/2024/apr/03/tr...and
The Washington Post here
https://www.washingtonpost.com/technology/2024/02/...here is a summary of key dates, events and actors in the Trump SPAC saga.
* Digital World Acquisition Corporation (DWAC) was founded on December 20, 2020 as a SPAC
* a major backer of DWAC was ARC Capital of Shanghai, already under investigation by the SEC
* Trump Media Technology Group (TMTG) was founded February 8, 2021
* Truth Social is launched as an app on February 21, 2021 only thirteen days after the company was founded
* CEO of DWAC begins private talks with Trump in March 2021 as potential target
* CEO of DWAC apparently begins hinting to others that TMTG is the target, prompting large purchases of DWAC that attract the attention of investigators
* two of the biggest holders of DWAC were Russian-American Anton Postolnikov and Ukrainian-born Michael Shvartsman
* DWAC executed its IPO on September 21, 2021
* Trump announced the deal for DWAC to take TMTG public in October 2021
* immediately after, Postolnikov dumped his shares for $22 million and Shvartsman dumped his for $18 million
* those two insider sales triggered a larger investigation into ALL of the initial DWAC investors
That's the first part of the saga. As the result of the events in Act I, the actual operations of TMTG and the Truth Social app are continuing to burn cash while the ability of DWAC to execute the merger with TMTG via IPO is frozen during the investigation. Act II reflects another round of dubious interactions as TMTG attempts to find cash to keep up the appearance of an operating company for Truth Social.
* TMTG was already near failure due to low revenues by December 2021
* Trump had zero ability to obtain loans from US banks
* DWAC investors could not be convinced to chip in more money for that lifeline to TMTG
* miraculously, funds were made available from an entity called ES Family Trust
* a first payment of $2 million was made in December 2021
* a second payment of $8 million was made in February 2022
* existence of ES Family Trust dates back at least three years, meaning prior to 4/3/2021
* the bank account of ES Family Trust exists in Paxum Bank located in Dominica
* Paxum Bank is not licensed to do business in the United States
* paperwork for the trust lists a Russian lawyer living in St. Petersburg, Russia as the settlor
* records for the trust show Anton Postolnikov has access to the trust's account in Paxum Bank
* Anton Postolnikov is actually a co-owner of Paxum Bank
* Anton Postolnikov is the nephew of Aleksandr Smirnov who was a "close ally" of Vladimir Putin -- Sminov actually died from COVID in 2020.
NOTE: Aleksandr Smirnov in THIS sleazy Trump intrigue is not to be confused with Alexander Smirnov, the FBI informant who was indicted in February 2024 for lying to federal agents regarding the Hunter Biden / Burisma nothingburger, nor to be confused with a different Aleksandr Smirnov in Russia who is actually aligned with anti-Putin forces with numerous articles published online.
* federal investigators were tipped off about the payments in October 2022 by a former TMTG employee
that informant told the FBI TMTG executives were initially wary of the incoming funds but decided to keep them because they could not stay afloat without the money
* Michael Shvartsman and his brother were indicted in June 2023 for insider trading related to their stakes in DWAC
* Michael Shvartsman and his brother both pled guilty on April 4, 2024 for insider trading
Based on the events reported by
The Guardian and
The Washington Post, it appears the key triggers for these investigations were
* involvement of ARC Capital in the filing of the original SPAC since ARC was already under investigation for money laundering
* suspicious trading in stock of DWAC prior to it announcing any target
* a tip that the DWAC CEO was meeting with Trump in March 2021 prior to DWAC's IPO in September 2021
* a tip in October 2022 that TMTG leaders had accepted $10 million as an operations lifeline from a foreign account and kept it
I am not familiar with all of the details that must be submitted when a company files for an IPO but I would guess an accurate list of all investors with more than $X,000,000 invested and a list of all foreign sources of funds would be on that list. Since Anton Postolnikov is likely the only actor with control of the account for the ES Family Trust and he co-owns Paxum Bank, it would be reasonable to assume federal officials are treating the use of ES Family Trust as a money laundering scheme to hide an off-shore bank as the true source of funds provided to TMTG. Certainly, federal prosecutors are looking at communication between the DWAC CEO and Donald Trump prior to DWAC's IPO as a securities violation. Again, under SPAC rules, the SPAC entity cannot have any target identified or selected prior to the IPO of the SPAC.
The guilty pleas filed on April 3, 2024 for insider trading charges technically do not involve Trump since Michael Shvartsman and the others were sharing information with friends and family, not with Trump, nor are there allegations Trump was aware of those conversations. However, they add to the overall atmosphere of sleaze permeating the entire saga which may reflect poorly on others as they have to defend themselves against actual criminal charges.
Long story short, I cannot imagine any circumstance under which federal officials will allow this charade to reach the point of Trump being able to cash out his position before the feds suspend all insider trades or the stock collapses to zero.
WTH
