Truth Social’s Going Public Might Save Donald Trump’s Bottom Line — but Don’t Bet on It

Trump could make a lot of money from Truth Social’s stock, but its business prospects are questionable.

D onald Trump is really rich. He’s been really rich for a long time and has succeeded in living like a really rich person even through the bankruptcy of six of his enterprises, lawsuits nearly too numerous to count, and a great many unpaid bills to people who made the mistake of working for him. But exactly how rich is Trump? That’s long been a subject of mystery and controversy for three main reasons: Trump habitually puffs up his wealth, his holdings are mostly not in public companies with transparent balance sheets, and his extensive assets tend to be heavily leveraged with debt. In day-to-day life, the debts are not so much of a problem; as the old saying goes, when you owe the bank $10,000, the bank owns you, but when you owe the bank $10 million, you own the bank. But debt is a big problem when you suddenly need a huge amount of liquid cash.

The liquidity crunch is why Andy McCarthy and Rich Lowry argue that Trump faces real financial trouble if he has to post bonds in order to appeal over $500 million (including interest) in civil verdicts against him. The verdicts come from the New York attorney general’s civil fraud case (which is about the opaque nature of Trump’s own balance sheet) and the E. Jean Carroll defamation cases in New York federal court. Mounting legal fees and verdicts, in turn, are why Trump has been desperate to end the presidential primaries and gain full control over the Republican National Committee. But the prospect that Trump would siphon off the RNC’s resources is so radioactive to donors that Trump campaign manager Chris LaCivita felt compelled to publicly disclaim, at least for now, any intention to do so upon taking over RNC operations.

Trump might have a big windfall coming that could get him out of this bind. Whether he’ll be able to access it to manage his immediate cash-flow issues, however, is another story. That windfall would come from his taking public the company that runs his social-media platform Truth Social. Therein lies part of the reason why Trump has remained a loyal user of Truth Social even when it would seem that his obvious interest as a national candidate is in using Twitter/X and other platforms that provide direct exposure to a much larger audience.

In October 2021, the Trump Media and Technology Group — which operates Truth Social — agreed to a merger with Digital World Acquisition Corp. The merger agreement was finalized in May 2022. Digital World’s stock has been publicly traded since the company went public in September 2021, but Digital World itself is just a shell designed for the merger. People — we can debate whether to call them “investors” — have bid up Digital World’s stock price in anticipation of its closing the merger and taking ownership of Trump Media. On February 15, the Securities and Exchange Commission finally gave the green light for the deal to go forward. A vote by Digital World shareholders is scheduled for March 22, three days before Trump goes on trial in New York criminal court in the Stormy Daniels hush-money case.

Backing into the Markets

A brief review of the regulatory backdrop is required to understand what is going on here. There are two main ways for a privately owned company to sell its stock on the public markets. One is to do an initial public offering. The other is to sell it to a company that is already public. When the acquirer is basically a shell corporation designed to enable such a deal, it’s commonly referred to as a reverse merger.

Why do a reverse merger? An IPO involves an onerous set of disclosures required by federal statutes and SEC rules. Among other things, a downside of an IPO is greater exposure to lawsuits filed under comparatively plaintiff-friendly rules. The Securities Act of 1933 allows the company and the people signing the registration statement to be sued for materially false or misleading disclosures (including material omissions of required disclosures) without proof of intentional deception. It also shifts to the defendant the burden of proving that investor losses were caused by some factor other than the untruths. And lawsuits can be brought in state courts that may be very unfriendly. The registration statement requires the sign-off of underwriters and auditors for the financial statements — institutional gatekeepers who cost money and may not be eager to lend their good names to a Trump business. Plus, newly listed stocks have to be approved for listing on an exchange (Digital World is traded on NASDAQ), and there are listing fees.

By contrast, a reverse merger requires only compliance with the comparatively more lenient disclosure requirements for a merger, such as issuing proxy statements in advance of the vote of the shell company’s existing shareholders. Lawsuits over failures of disclosure would have to be decided under the more demanding requirements of the anti-fraud statutes and rules of the Securities Exchange Act of 1934, which can only be brought in federal court under strict pleading rules. For Trump, who has been a piñata for the legal system of late and was the target of class-action lawsuits under the 1933 act as far back as the early 1990s (when he was sued by buyers of bonds issued by his casino business), there are sound reasons to prefer a reverse merger.

The theory of the federal securities laws is that the SEC doesn’t engage in “merit regulation” — that is, it doesn’t decide what stocks are too risky or worthless to offer to the public. It’s supposed to just ensure that companies comply with the disclosure rules; the markets do the job of valuing the stock. But it does review registration statements in advance, and regulators may ask for more information or clearer disclosures if it doesn’t appear to them that the proposed registration statement is adequate. It typically takes a few months to get an IPO to market, although, as with many things in the world of bureaucracy, that can vary.

In theory, a reverse merger can get to market a lot faster. So why has it taken almost two and a half years, such a long time that market observers thought the deal would die? We can’t discount the possibility that the SEC shares the hostility to Trump that pervades other federal agencies, but there are more prosaic explanations. The SEC for years now has cast a skeptical eye on reverse mergers, which it regards as efforts to evade the rules (it has been especially alarmed about the use of such vehicles by Chinese companies seeking to list in the U.S.). As Matthew Goldstein of the New York Times summarizes, Trump and his business partners made yet another legal mess that gave the regulators all the reason they would need to put Digital World under a microscope:

The deal was held up by a two-year investigation by the Securities and Exchange Commission into talks between the companies that took place before Digital World went public. [Special purpose acquisition companies], which sell shares to investors before they can buy a company, aren’t supposed to have a deal lined up before their I.P.O. Digital World raised $300 million in its I.P.O. in September 2021.

Last July, Digital World agreed to pay an $18 million penalty to the S.E.C. and revise its corporate filings to better reflect the nature of those early negotiations. The S.E.C. signed off on the merger document this month, setting the stage for the shareholder vote.

The deal had also been stymied by a criminal investigation, in which federal prosecutors charged three men with taking part in a scheme to profit from the October 2021 merger announcement. The men are slated to go on trial in Manhattan federal court on April 29.

It’s also faster to get to market when the acquirer has already registered the shares. Because Digital World is a comparatively new issuer, it still had to issue a Form S-4 registration statement for the shares to be issued in the merger, and that registration statement entails many of the cost, paperwork, and legal-risk drawbacks of an IPO. The filing lists Adeptus as the company’s auditor and EF Hutton, a division of Benchmark Investments, LLC, as the lead underwriter. (The latter is a blast from the past for anyone who recalls the original E.F. Hutton firm, which had a powerful brand name and a famous ad campaign in the 1980s; the current iteration revived the brand in 2021.) Conveniently for Trump, however, because the Form S-4 is issued in advance of the merger and he has no current position with Digital World, he is not a signatory to the registration statement. He therefore cannot be sued over its contents unless plaintiffs could establish that he controls the company and its statements.

The Big Payoff

Under the merger agreement, a bunch of new Digital World shares will be issued to the owners of Trump Media, the largest of whom is Trump. That would net Trump a position of 79 million shares in the company’s stock (between 58 percent and 69 percent of the outstanding shares), worth an eye-popping $4 billion at current market prices — if the stock keeps trading at those prices long enough for Trump to cash in his shares.

But there are complications. Legally, Trump has a “lockup” agreement with the company, barring him from selling his shares for six months. Lockup agreements are customary for key executives and backers of a company that is going public for the first time. They exist to give important executives an incentive to stay with the company, to prevent large-scale selling that would crash the stock price, and to reassure investors that they’re not being sold an overvalued property that the insiders are eager to unload. Digital World could waive the lockup, but that requires shareholder approval, and early sales could raise the risk of shareholder suits alleging insider trading by Trump and breaches of fiduciary duty by the Digital World board. So, while I wouldn’t be surprised to see the company modify the lockup to allow some sales, it’s unlikely to give Trump a free hand to cash out — and if he tried to do so all at once, he’d almost certainly tank the price and net a lot less than $4 billion.

That doesn’t mean that Trump can’t access that money at all. There are still structures available for borrowing money with locked-up stock as collateral, and there’s never a shortage of people willing to loan Trump money. Such loans, however, could create another potential field of legal risks regarding what Trump discloses to the lenders and what he tells (or doesn’t tell) the market about his borrowings.

The Market Risks

The $10 billion market cap for the new company (at current prices) would be half the size of Twitter/X. As Helen Coster and Sruthi Shankar of Reuters observed the day the merger approval was announced:

The value assigned to the deal by the stock market has jumped more than threefold since January, as Trump tightened his grip on the Republication nomination for president. . . . Digital World shares rose 16% to $50.49 in afternoon trading in New York on Thursday.

Today, the stock has been trading in the $45–47 range. Does that make any sense? Coster and Shankar:

[Trump Media] posted total revenue of $3.4 million in the first nine months of 2023, up from $237,000 a year earlier, according to the Digital World filing. Its operational loss was $10.6 million, down from $19.3 million a year earlier. . . . Trump has 6.61 million followers on Truth Social, compared to the more than 88 million followers he had on X when the platform permanently suspended him, and the 87.4 million followers he currently has on that platform. . . . Digital World says Truth Social has so far had 8.9 million signups. X, by comparison, has more than half a billion monthly users, according to Musk.

This does not look like the profile of a multibillion-dollar social-media company, nor — with operating losses three times the size of its revenues — of an enterprise on the cusp of profitability.

Brett Arends at MarketWatch adds some acid skepticism, noting the extensive risk disclosures of Trump’s past business failures and current legal problems: “You know you’re buying a quality stock when the prospectus reads like a police blotter.” As Arends observes, in spite of Trump Media’s comparatively small revenues, “somehow, it racked up $37.7 million in interest expenses,” and it’s hard to find anything resembling reliable metrics for how the company is supposed to make money:

If you want more financial details about Truth Social before investing, you are not alone. The board of Digital World, the would-be merger partner, admits that it, too, would like more financial details.

Alas, Trump’s business “did not provide the Digital World Board with [Trump Media’s] financial projections in connection with the Digital World Board’s bring-down due diligence process,” the board reveals.

“[I]nvestors should be aware that since its inception, [Trump Media] has not relied on any specific key performance metric to make business or operating decisions,” the prospectus reports. “Consequently, it has not been maintaining internal controls and procedures for periodically collecting such information, if any.” My italics.

The Trump operation has chosen not to track these metrics. It reports: “At this juncture in its development, [Trump Media] believes that adhering to traditional key performance indicators, such as signups, average revenue per user, ad impressions and pricing, or active user accounts including monthly and daily active users, could potentially divert its focus from strategic evaluation with respect to the progress and growth of its business.”

It’s hard to see what value Truth Social has outside of Trump himself, and it’s not clear that Trump Media has any other business ventures that stand any chance of turning a profit. The company is run by former congressman Devin Nunes, whose background is in farming and conducting House investigations, not running a media corporation. Trump will also face yet another round of calls for him to cancel his relationship with the platform if he returns to office. He will probably keep posting to the site after the election, win or lose, but who will join him?

The company proposes to trade, after the merger, under the ticker symbol DJT (previously used by a since-bankrupt Trump casino company). That’s appropriate. The people buying the stock seem to be investing mostly in Trump himself and aiming to do so outside of the legal strictures for giving money directly to politicians. In the long run, that seems more likely to be the value of this enterprise than turning investments into profits.