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Enforcement News: SPAC, Digital World Acquisition Corporation, Settles Charges With The SEC In Connection With IPO And Proposed Merger

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  • Posted on: Jul 24 2023

By: Jeffrey M. Haber

In the merger and acquisition world it is common to form a special purpose acquisition company (“SPAC”). A SPAC is a company with no underlying business operations that is formed to raise capital through an initial public offering (“IPO”) for the purpose of using the proceeds to acquire an unidentified private operating company at a later date but within a specified period of time (typically two years).

A SPAC is also known as a blank check company (i.e., a publicly traded, developmental stage company that has no established business plan). SPACs have existed for decades. Recently, however, their popularity has been on the rise. “In 2020, 247 SPACs were created with $80 billion invested, and in 2021, there were a record 613 SPAC IPOs. By comparison, only 59 SPACs came to market in 2019.”1 

Following its IPO, a SPAC will seek to identify acquisition candidates and attempt to complete a business combination transaction after which the company will continue the operations of the acquired company as a public company. Investors in a SPAC at the IPO stage are, therefore, relying on the management team that formed the SPAC to expend efforts after the IPO to identify and look to acquire or combine with a private operating company.

Given that the purpose of a SPAC is to identify and acquire an operating business after conducting its IPO, steps a SPAC has taken in furtherance of a particular acquisition is material to a reasonable investor, who would want to know about the SPAC’s prospects with future acquisition targets. Disclosures made in a SPAC’s IPO – including as it relates to any pre-IPO discussions or negotiations with future acquisition targets or concerning potential business combinations – need to be accurate and cannot be materially false or misleading.

In addition, the economic interests of the sponsors and the directors, officers, and affiliates of a SPAC often differ from the economic interests of public shareholders, which may lead to conflicts of interests as they evaluate and decide whether to recommend business combination transactions to shareholders. Clear and accurate disclosure regarding these potential conflicts of interest and the nature of the sponsors’, directors’, officers’ and affiliates’ economic interests in the SPAC is particularly important because these parties are generally responsible for negotiating the SPAC’s post-IPO business combination transaction.

The SPAC sponsor2 typically is compensated through its ability to buy the SPAC’s securities at a discount at or around the time of the SPAC’s formation. Sponsors also frequently buy additional securities (usually units or warrants) at the time of the IPO. Unlike securities bought by investors in a SPAC IPO, the securities purchased by a sponsor are not redeemable for cash in the event the SPAC fails to complete a business transaction, and the sponsor’s securities usually have restrictions that prevent resale until after completion of a SPAC’s business combination.

[Eds. Note: Most of the foregoing explanation of a SPAC and the importance of clear and accurate  disclosures comes from the Order Instituting Cease-and-Desist Proceedings against Digital World Acquisition Corporation (here). For a discussion of the pros and cons of a SPAC, see Young, Julie, “Special Purpose Acquisition Company (SPAC) Explained: Examples and Risks,” Investopedia.com (Mar. 15, 2023) (here).]

In the Matter of Digital World Acquisition Corporation

On July 20, 2023, the Securities and Exchange Commission (“SEC”) announced (here) that it settled fraud charges against Digital World Acquisition Corporation (“DWAC”), a special purpose acquisition company, for making material misrepresentations in forms filed with the SEC as part of DWAC’s IPO and proposed merger with Trump Media & Technology Group Corp. (“TMTG”). According to the Order Instituting Cease-and-Desist Proceedings against Digital World Acquisition Corporation (here) (the “Order”), 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.

As set forth in the Order, DWAC filed an amended Form S-1 in support of its IPO in early September 2021. The Form S-1 stated that neither DWAC nor its officers and directors had any discussions with any potential target companies prior to the IPO. But, as the SEC found, as early as February 2021, an individual who would later become DWAC’s CEO and Board Chairman, and others involved with DWAC, had extensive SPAC merger discussions with TMTG. The SEC found that, while DWAC’s CEO and Chairman initially pursued these discussions with TMTG on behalf of another SPAC, he created a plan in the spring and summer of 2021 to potentially use DWAC to pursue a merger with TMTG and used this plan to solicit certain pre-IPO investors. The SEC also found that 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, said the SEC, DWAC’s amended Form S-1 was materially false and misleading.

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

Commenting on the settlement, 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.”

In the Order, the SEC found 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.

In June 2023, federal prosecutors in the U.S. Attorney’s office for the Southern District of New York filed charges against three investors for insider trading related to DWAC’s deal with TMTG. According to the indictment, the investors allegedly made more than $22 million by illegally trading on knowledge that DWAC would purchase TMTG — before it was public knowledge (here). The SEC also filed civil insider trading charges against the three investors (here).3

Also commenting on the settlement, Eric Swider, the Chief Executive Officer of DWAC, stated: “Through steadfast dedication to our shareholders, we tirelessly worked to reach a settlement with the SEC regarding charges against DWAC. This is an important milestone for us, as it clears the path for the SEC to review our expected upcoming filing of the Registration Statement related to our proposed merger with TMTG. Subject to further SEC review of our future filings related to the merger, we are eager to move forward the consummation of the business combination with TMTG and we look forward to TMTG’s cooperation in this regard.”


  1. See Young, Julie, “Special Purpose Acquisition Company (SPAC) Explained: Examples and Risks,” Investopedia.com (Mar. 15, 2023) (here) (citing, Harvard Business Review. “SPACS: What You Need to Know” (here), and Statista, “Number of Special Purpose Acquisition Company (SPACs) IPOs in the United States from 2003 to February 2022” (here).
  2. A SPAC sponsor is the entity and/or persons primarily responsible for establishing the SPAC, which is thereafter managed by a board of directors and management.
  3. A copy of the SEC’s complaint can be found here.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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