Digital World Acquisition could plummet 78% as regulatory scrutiny means it will likely never merge with Trump's Truth Social media platform, short seller says

• Digital World Acquisition fell 9% on Wednesday after Kerrisdale Capital released a short report.
• Kerrisdale said Digital World could fall 78% on the belief that it will not complete its merger with Truth Social.
• "DWAC is not just another dubious 2021 SPAC; it is a poster child for some of the worst abuses the investment vehicle has spawned," Kerrisdale said.

Digital World Acquisition, the SPAC that plans to merge with former President Donald Trump's Truth Social, fell 9% on Wednesday after Kerrisdale Capital released a short report targeting the company.

Kerrisdale is short shares of Digital World and expects the stock to fall to $10, representing potential downside of 78% from Wednesday's levels.

That view is driven by Kerrisdale's belief that DWAC will fail to complete its merger with Truth Social, combined with the fact that poor execution at Truth Social puts into question its ability to successfully launch an alternative social media platform.

"DWAC's stock has much further to fall given the demonstrably misleading statements in DWAC's registration statement, the status of TMTG's operations at the time the merger agreement was executed, the cast of characters seeking to consummate that merger and those individuals' flagrant disregard for SEC rules and regulations," Kerrisdale said.

As the SEC cracks down on SPACs, which allow companies to go public with fewer disclosures compared to a traditional IPO, the agency can and likely will use DWAC as an example to send a message to market participants, according to Kerrisdale.

Digital World is already under active investigation by the enforcement division of the SEC, Kerrisdale highlighted. "DWAC is not just another dubious 2021 SPAC; it is a poster child for some of the worst abuses the investment vehicle has spawned," Kerrisdale said.

And even if a deal does get done between Truth Social and Digital World, the company's current valuation "is absurd and financial projections are based on the flimsiest of assumptions," Kerrisdale said.

With no financial performance to speak of, a bug-riddled launch of the social media platform last month, and a slew of executive departures early into the company's formation, a pro-forma market valuation of $8.2 billion is too high, according to the short report.

"Subscriber projections for Truth Social are based on an unreliable Politico poll, while the Truth Social streaming video on demand service is supposed to miraculously win 50% of Netflix's US subscriber base by 2026 by streaming 'non-woke' entertainment without any explanation as to how it will afford billions of dollars in content," Kerrisdale said.

Shares of Digital World were already under pressure prior to the short report as Elon Musk attempts to acquire Twitter. DWAC shares are down 75% from their record high of $175.