Avoid Digital World Acquisition (DWAC); Tether Fails to Dispel Mystery on Stablecoin's Crucial Reserves; I summited Cotopaxi this morning

1) In my October 22 e-mail, I warned my readers away from the shares of Digital World Acquisition (DWAC), a special purpose acquisition company ("SPAC") that had announced a deal to partner with a company owned by former President Donald Trump, Trump Media & Technology ("TMTG"), to launch a social media company called TRUTH Social. I wrote:

To be clear, my view that this is one of the stupidest things I've ever seen and that this stock is going to implode, likely within days, has nothing to do with my political views. As I wrote in my October 4 e-mail, "Many people let their partisan views affect all sorts of nonpolitical decisions – including financial ones," which is a recipe for disaster.

It's simply based on the fundamentals (of which there are essentially none; TRUTH Social is nothing more than an idea at this point) and the long, dismal financial track record of those who've done business with the former president.

If you want to support him, there are far better ways to do so than buying DWAC.

It was a prescient warning. That day, the stock spiked to a peak of $175 but closed at $94.20, and it's been mostly downhill ever since: The stock closed yesterday at $51.07.

I am now even more convinced that the stock should be avoided at all costs, as I think the U.S. Securities and Exchange Commission ("SEC") is likely to block the merger, at which point DWAC will quickly trade back down to its cash balance of $10 per share.

If the SEC acts, the reason it will cite is that there were discussions between DWAC's CEO and representatives of Trump before DWAC's initial public offering ("IPO"), which is forbidden. The details were exposed in this article in yesterday's New York Times: Trump's Media Company Is Investigated Over Financing Deal. Excerpt:

One day in April, a group of men gathered on a videoconference call to discuss a deal to bankroll former President Donald J. Trump's planned media company.

Among the participants, according to two people familiar with the call, were Mr. Trump's representatives and the chief executive and a future board member of Digital World Acquisition, a so-called blank-check company that would announce the deal with Mr. Trump six months later.

At the time, Patrick Orlando, Digital World's chief executive, was also running several other blank-check companies, and it's unclear which one he was representing on the videoconference.

Yet the month after the video call, which has not been previously reported, Digital World said in securities filings that it had not identified or begun talking with any potential merger targets.

Blank-check companies like Digital World, also called special purpose acquisition companies, or SPACs, sell their shares to investors first and then go looking for a business to merge with. They aren't supposed to have a deal lined up before selling shares.

On Monday, Digital World said regulators were investigating. The Securities and Exchange Commission has requested information about the deal, including the identities of some investors and "certain documents and communications" between the SPAC and Mr. Trump's company, Trump Media & Technology...

The New York Times reported in October that Trump Media's discussion of a deal with an executive of Digital World may have skirted securities laws because the SPAC did not disclose those talks in its filings. The April videoconference is a further indication that may have happened.

"The SEC requires disclosure of deals that may be in the works, so everyone is working with the same information," said Tyler Gellasch, a former SEC lawyer who is a fellow at Duke University School of Law.

But the real reason, I suspect, if the SEC blocks the deal, is that it dislikes the recently announced $1 billion private investment in public equity ("PIPE"), which allows the investors in the PIPE (mostly hedge funds, I assume) to rip the faces off of retail investors by buying the stock for a 40% discount to the market price and immediately dumping it in the market for a quick 67% gain. Bloomberg's Matt Levine covered the details in his column on Monday: The Trump SPAC Did a PIPE. Excerpt:

There are two basic ways to think about raising a PIPE here:

1. Go out to institutional investors, explain the business model, introduce them to the experienced management and technical teams, give them financial projections and let them pressure-test them, and generally get investors comfortable with a high 10-digit fundamental valuation for this company.

2. Go out to institutional investors and say, "look if you buy stock at $30, you can sell it to some retail rubes at $40."
        
On Saturday, TMTG and DWAC announced a billion-dollar PIPE, and if you read the announcement very carefully, I think you can tell which approach they took...

What will these PIPE investors do when they buy stock at a 40% discount to the trading price after the SPAC merger? I don't know, but I think ... they will ... sell it? For more than they paid for it? Like if the stock is trading at $45, the SPAC investors will buy at $27 and then sell at $45. If the stock is trading at $80, the SPAC investors will buy at $33.60 and sell at $80.

Ordinarily, in SPAC mergers, the PIPE investors can't sell their stock the day after the merger closes because the company has not yet registered their resales of stock with the Securities and Exchange Commission...

Not in the Trump deal...

DWAC and TMTG have promised the PIPE investors that they'll be able to freely resell their stock the minute the merger closes...

... the important point is that the PIPE here is explicitly designed for TMTG to sell stock to hedge funds at a huge discount and for those hedge funds to immediately turn around and sell the stock to retail investors at a markup. That's why the conversion price and registration rights are set up the way they are. This is an indirect way to do a big meme-stock offering to retail investors, with some hedge funds standing in the middle and getting a cut.

Levine heaped even more scorn on this in yesterday's column: The Trump SPAC Pitch Is Weird.

In summary, everything about this company and deal is a total scam, carefully engineered to rip off retail investors and/or Trump supporters.

As such, mark my words, there's no way the SEC allows this to go through...

2) I've warned my readers many times about Tether (USDT), a stablecoin used to facilitate trades in the crypto market. The company's latest disclosures further reinforce my belief that it's likely a Ponzi scheme: Tether Fails to Dispel Mystery on Stablecoin's Crucial Reserves. Excerpt:

The latest financial disclosure from Tether, which serves as a controversial foundation for much of the cryptocurrency market, didn't shed any more light on where its reserves are held.

Tether had assets totaling at least $69 billion as of Sept. 30, according to an assurance from Cayman Islands-based Moore Cayman. That includes $30.6 billion in commercial paper and certificates of deposit, $7.2 billion in cash, almost $1 billion in money market funds, and $19 billion in Treasury bills.

The disclosure showed that Tether shifted about $1 billion in "reverse repo notes" holdings to money-market funds. However, they don't specify in which countries the money funds are based. It also noted a reduction in the percentage of total assets held in commercial paper from the end of June.

Bennett Tomlin, an independent researcher who has been critical of Tether and the affiliated crypto exchange Bitfinex, said today's disclosure is "very similar to the last several attestations," despite new language defining the credit rating companies referenced in the report.

Tether is holding "a lot of commercial paper – it's not clear from where or how," Tomlin said. Other unanswered questions include the type of digital assets in its holdings, the counterparties for its secured loans, and the use of yields from the holdings.

Here's another related article: Regulators Sound the Alarm on Stablecoins.

3) I summited Cotopaxi, the world's highest active volcano (19,347 feet), this morning. Here's a picture of my guide Paul and me at the top, with the sunrise behind us:

I've posted details and more pictures on Facebook here.

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.