Why Shares of Digital World Acquisition Corp. Are Rising Today - The Motley Fool

What happened

Shares of the shell company Digital World Acquisition Corp. (DWAC 10.37%) were up by 10.3% as of 11:48 a.m. ET Wednesday. Investors appeared to be buying the dip after what has been a big sell-off. Even with the morning's gains, the stock is still down more than 31% over the last five days.

DWAC is the special purpose acquisition company (SPAC) planning to merge with Trump Media & Technology Group (TMTG), the parent company of Truth Social, an alternative social media platform backed by former President Donald Trump.

Image source: Getty Images.

So what

When the news first came out that Digital World would be taking TMTG public, its shares shot up on the belief that Trump's large following and their desire for alternatives to mainstream social media could turn the new company into a success.

But since then, the consummation of that planned SPAC merger has been thrown into doubt. Regulators have requested information pertaining to it, and most recently, the Securities and Exchange Commission (SEC) expanded its inquiry. Digital World disclosed in a regulatory filing Tuesday that the SEC is subpoenaing "documents [from DWAC] and information with respect to, among other things, communications regarding and due diligence of potential targets other than TMTG."

In another filing Wednesday from DWAC, the company said the "team has been tirelessly working toward consummating its proposed business" and hopes to "afford Digital World stockholders, both large and small, the opportunity to participate in the process of the Business Combination." It's possible that investors see that filing as a good sign that the merger will eventually take place. It's also possible that many are merely buying the dip.

Now what

I have serious doubts about DWAC -- related to both the odds of it completing its merger with TMTG, and also to the potential for Truth Social to be a success from a business perspective.

Hedge fund Kerrisdale Capital is shorting DWAC due to its belief that it will never be able to consummate the merger. "The SEC is cracking down on SPACs and $DWAC is a poster child for some of the worst abuses the investment vehicle has spawned," the company tweeted in April.

Furthermore, TMTG has experienced a host of issues from technical bugs to high-level executives leaving the company, and I just don't know if the alternative social media platform is truly sustainable.

Truth Social previously told investors it would have 16 million users by the end of 2022. Various media reports pegged its total user base at 1.5 million to 2 million currently, so the site will have a lot of work to do to hit these initial projections. For all of these reasons, I am staying away from the stock.

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Why Shares of Digital World Acquisition Corp. Are Rising Today - The Motley Fool
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