Digital World Acquisition Corp. (DWAC - Get Rating) is a Miami, Fla.-based blank check company that went public through an initial public offering on September 2, 2021. The company was created to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses.

DWAC priced each of its units at $10, raising $250 million in gross proceeds through the offering. Each unit consists of one class A common stock and half of a redeemable warrant. DWAC plans to merge with middle-market and emerging growth technology-focused companies in the Americas that do business in Software-as-a-Service (SaaS) and Technology or Fintech and Financial Services.

DWAC stated in its prospectus that it would allow shareholders to redeem all or a portion of their holdings upon the completion of its business combination. Shares of DWAC have gained 423.1% in price since its stock market debut to close yesterday’s trading session at $52.05.

Here is what could shape DWAC’s performance in the near term:

Business Combination

DWAC plans to acquire SaaS and Technology or Fintech and Financial Services companies with enterprise value ranging from $400 million – $2 billion. The company is set to merge with former President Donald Trump’s Trump Media & Technology Group Corp. (TMTG).

Under the subscription agreements, DWAC will receive a $1 billion PIPE investment from TMTG following the successful business combination of the two companies. The merged company is expected to be named TRUTH Social. DWAC is expected to raise $1.25 billion in net proceeds through this merger. High-growth neutral video distribution platform Rumble Inc. will provide TRUTH Social’s infrastructure and video delivery services  

DWAC Chairman and CEO Patrick Orlando said, “Our focus on delivering public shareholder value drives our decision making and by accepting these commitments for a strategic infusion of growth capital, we believe the combined company can grow on an incredibly strong foundation. The liquidity that will be provided to the combined company balance sheet, in excess of the up to $293 million (less expenses) that DWAC may provide, should fortify the strategic positioning of TMTG. I am confident that TMTG can effectively deploy this capital to accelerate and strengthen the execution of its business, including by continuing to attract top talent, hire top technology providers, and roll out significant advertising and business development campaigns.”

SEC Probe

On October 29, The New York  Times published an article titled “Trump’s $300 Million SPAC Deal May Have Skirted Securities Laws.” The article highlights how DWAC has not included any conversations between its executives and Trump in its securities filings. Lawyers and industry officials state that the lack of disclosure of these conversations might be considered an omission of material information, thereby drawing scrutiny from the SEC.

On November 17, Senator Elizabeth Warren wrote a letter to the SEC requesting a formal investigation into the potential securities violations by DWAC. This SPAC deal, according to Warren, “may have committed securities violations by holding private and undisclosed discussions about the merger as early as May 2021, while omitting this information in U.S. Securities and Exchange Commission (SEC) filing and other public statements.”

She also stated that the merger seems to be a “textbook example of a SPAC misleading shareholders and the public about materially important information.” The Senator cited the N.Y. Times article in her letter.

Following this, the SEC and other regulators, including FINRA, launched a formal investigation into the DWAC’s merger with TMTG. The SEC has requested DWAC  provide information regarding its trading policies, investors, and communications with TMTG.

Lawsuits

After the SEC probe was announced, law firm Pomerantz LLP launched a private investigation to determine whether certain officers and/or directors of DWAC have engaged in securities fraud or other unlawful business activities.  

Also, private equity investor Brian Shevland is suing DWAC CEO Patrick Orlando, claiming that the company’s merger with Trump’s TMTG is a “brazen act of fraud.”

Unfavorable POWR Ratings

DWAC has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of D for Value, Stability, and Sentiment. Of the 123 stocks in the D-rated Financial Services (Enterprise) industry, DWAC is ranked #111.

In addition to the grades I have highlighted, view DWAC ratings for Growth, Momentum, and Quality here.

Bottom Line

DWAC’s merger with TMTG to form TRUTH Social should allow the company to capture a niche market. However, federal investigations into DWAC’s merger are expected to delay the SPAC’s launch. Moreover, the company might have to spend a portion of its funding raised through the business combination to pay legal fees, negatively impacting its financials. Thus, we think the stock is best avoided now.

How Does Digital World Acquisition Corp. (DWAC) Stack Up Against its Peers?

While DWAC has a D rating in our proprietary rating system, one might want to consider looking at its industry peers, Forrester Research, Inc. (FORR - Get Rating), Consumer Portfolio Services, Inc. (CPSS - Get Rating), and Donnelley Financial Solutions, Inc. (DFIN - Get Rating), which have an A (Strong Buy) rating.

Note that DFIN is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.

Click here to check out our Software Industry Report for 2021

DWAC shares rose $0.62 (+1.19%) in premarket trading Thursday. Year-to-date, DWAC has gained 423.12%, versus a 26.76% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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