Trump Media got a lot of attention when it went public through a special mechanism, saw a lot of positive reception in the markets, and left the former president with a reported approximate $3 billion in value of the shares he got.
But some recent news cut a gash in the side of the balloon, showing what had been financial weakness effectively covered up by complicated Wall Street mechanisms. A lot of individuals who paid real cash for shares on the hopes of a smart investment just lost a lot of money.
While some might think this is a form of political schadenfreude, it’s not. Instead, this is a sad review of yet another object lesson of why, if you’re not an insider, you shouldn’t bother to invest in an IPO and why to always avoid SPACs.
Let’s start with the latter. A SPAC, or special purpose acquisition vehicle, is a shell of a company that is made public. There are lots of complexities behind it, but the short version is that the company is created and funded to buy another company that wants to go public quickly and that, in the estimate of the people who started the SPAC, will pay off well.
Because the initial company is a shell, under the rules for SPACs, it has a lot of flexibility in identifying and acquiring a prospect. The transaction has to be completed in two years, otherwise investors get their money back.
The acquired company gets a quick trip to being public rather than going through the much longer process of a traditional IPO. The SPAC gets a company with an existing business model, or at least idea, and now there are the resources to help it launch in a big way. That’s how WeWork ultimately went public.
Back in 2021, a report from software and data company Calcbench showed that there were many SPACs desperate to make a deal and that their choices demonstrated this. Out of 358 SPACs at the time, only 20 had revenue. Many had next to no assets, with one company showing only $203. No, the number isn’t missing a trailing billion, million, or even thousand. Just $203.
According to a 2023 Financial Times report, many of the companies that went public through SPAC madness were “heading into the financial year-end with weaknesses in their accounting practices, raising the prospect that their annual reports may not paint a true picture of their financial health.”
Also, when the acquisition subsumes the identify of the acquiring SPAC and goes public, there’s not a lot of financial data to give investors a deep insight into how the operating business had been doing. You can buy something shiny and then realize you picked an aluminum foil-wrapped slug.
Then there is the interest among investors in IPOs. People think they’re going to make a big return. Unfortunately, it’s not how it generally works. Insiders like the big customers of banks involved in the process get the first call and the initial price. Then they and some people within the company (most are prevented at the onset) sell a lot of through secondary markets. Put Individuals get convinced into buying shares at an intentional mark-up directed by demand and the ones who initially had the shares make the really big bucks.
That brings things to Trump Media & Technology Group Corp., with the ticker symbol DJT (for Donald J. Trump). When it went public through the SPAC on March 25, shares hit an intra-day high of $79.38, though settled at $49.95, according to data from S&P Global Market Intelligence. The price went up to $66.22 on March 26. It was worth nearly $8 billion, as the New York Times reported.
Then the company reported its results for 2023 — a $58 million loss. The company also warned against future ongoing losses. Shares dropped to $47 and a lot of people who were looking for a windfall just saw a gale take away a bundle of their money. The insiders who sold shares pocked strong profits.
The lesson is not to bet on IPOs or SPACs, no matter whose name is being promoted in them.
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