The Trump News headline on Friday was that investors in Truth Social, his money-losing social media platform, had voted to take it public at a valuation that could deliver profits.

former president him

about $3 billion.

There is speculation in the press that the transaction will ease Trump’s current cash crisis, including the need to post bond by Monday to cover a court judgment of about $500 million to prevent the seizure of some of his properties by New York To prevent Atty. General Letitia James. That speculation is probably, but not definitely, wrong.

From a financial perspective, the main questions are: Should you believe that figure? And would anyone in their right mind invest in this thing?

My ready judgments are: probably not, and probably not. This isn’t investment advice, but, really?

Let’s take a closer look at that.

Truth Social will go public through a merger with a special purpose acquisition company, or SPAC, called Digital World Acquisition Co. The merger was approved by investors in DWAC on Friday.

This arrangement came about despite several attempts

skeevy doubtful

aspects of the transaction. The intention is for SPACs to be created (via an initial public offering) without any pre-arranged takeover agreements, but rather to identify them within a certain period of time, normally within two years of their incorporation.

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However, the Securities and Exchange Commission charged in July that DWAC “formulated a plan to acquire and pursued the acquisition of TMTG” prior to its own IPO and failed to disclose it to investors. (TMTG is Trump Media and Technology Group, the parent company of Truth Social.) SWAC settled the SEC case for $18 million.

It should be noted that SPACs generally do not have that

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the best reputation in the corridors of the SEC, because that’s what they could be used to

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IPOs without making the usual pre-IPO announcements to investors.

The Trump deal, which has been percolating for more than two years, seemed like a potential high point for SPAC-related investment fraud from the start, as I wrote in 2021.

The merged entity is expected to have a valuation of approximately $5 billion. As a 60% owner of the entity, Trump would own about $3 billion worth of stock.

It is clear that the valuation has no rational relationship with Truth Social’s financial picture, which is extremely ugly.

In a prospectus issued last month, DWAC disclosed that Truth Social collected just $3.4 million in revenue in the first nine months of 2023 and posted a $49 million loss over that period.

The $5 billion estimate of the value of the merged company stems from the interest shown mainly by small investors fascinated by

Republican presidential candidate Trump

as a political figure and celebrity.

That puts Truth Social in the category of a “meme stock,” similar to GameStop, which soared to a stratospheric valuation in January 2021 because gullible retail investors thought they were dealing a blow to short sellers and hedge funds by driving up a stock’s market value. company that had little real value as a mall-oriented video game retailer.

GameStops

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the price peaked at over $500, or about $125, split-adjusted. Since then it has lost 90% of its value. In other words, you shouldn’t expect Truth Social’s market value to have much correlation with its revenues or profits, but with Donald Trump’s public status. As Mark Twain wrote in Huckleberry Finn, “You pay your money and you make your choice.”

As for how Trump can use Truth Social’s proceeds as a publicly traded company, the prospectus states that Trump and other principals agreed to a six-month lock-up of their shares, meaning he couldn’t sell them until mid-September or by could lend them. at the earliest. That means

That

he wouldn’t be able to use them to cover up the verdict that James could face as soon as Monday.

But there is an escape clause in the deal: Trump can ask the board for an exemption from the lock-up after the merger. How likely would that be?

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Pretty likely, I think. Of the twelve people Trump has nominated for the post-merger board, at least seven have personal ties to him. They are: Devin Nunes, who as a Republican congressman from California was an embarrassingly loyal Trump supporter and who left Congress in January 2022 to become CEO of Truth Social; Trump’s son Donald Jr.; Kash Patel, former Nunes aide and member of Trump’s executive branch entourage; Scott Glabe, former Trump White House aide and Trump appointee to a key White House post

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of Homeland Security; Robert Lighthizer, US Trade Representative under Trump; and Linda McMahon, the former CEO of World Wrestling Entertainment who became chairman of America First Action, a Trump-associated super PAC, and is now chairman of America First Policy Institute, a think tank focused on Trump’s policies.

What are the chances they would vote to thwart Trump’s need to convert his stock into cash? You can judge it. Keep in mind that any large-scale sale of Trump’s stock would likely send the stock price plummeting and send his unwary investors to the woodshed in the stock market.