In case you missed it... Shares of Donald Trump’s social media company plunged Monday after the company filed to register the potential sale of tens of millions of additional shares and the stock has just dipped below $23, erasing hundreds of millions of dollars from the company’s market value and putting a hugh dent in Trump’s majority stake.
Trump Media was expected to register the potential sale of new shares after the completion of its merger last month with Digital World Acquisition Corp., a cash-rich shell company known as a SPAC, or special purpose acquisition company. Companies that merge with SPACs typically file a registration statement a few weeks after the deal is completed for the sale of additional securities held by early investors.
In the filing, Trump Media, the parent company of Truth Social, registered more than 146 million shares of stock that could be sold, along with 21 million shares that were converted after the exercise of warrants, which enable an investor to buy shares at a preset price. When a SPAC goes public, it issues warrants to investors that can later be converted into shares.
Even though the company said the investors weren’t planning to sell those shares immediately, investors reacted to the notion that if a flood of new shares were to hit the market, they could depress the company’s stock price.
Also included in the filing were an additional 36 million shares given to Trump as part of an “earnout” bonus based on the company’s stock price. With those additional shares, Trump has about 115 million shares of Trump Media, or 65% of the company’s stock.
Some of the shares registered for sale included stock held by large hedge funds such as Anson Funds, Hudson Bay, Mangrove Partners and Washington Muse Investments, which had acquired discounted shares or warrants from Digital World before the merger with Trump Media. Others, such as Millennium Partners and Pentwater Capital, had built up stakes in the company by buying warrants.
Trump Media will not receive any of the proceeds from shares sold by investors, but it could receive tens of millions in cash from the exercise of the warrants.
Trump Media said in a news release Monday that the filing did not imply that the shareholders listed in the statement were planning to sell shares. The company also noted that the filing did not alter a six-month restriction Trump and other big shareholders from selling their shares before sometime in late September.
The registration statement must still be reviewed and approved by the Securities and Exchange Commission before any stockholders can sell shares.
Some investors had been betting that Trump Media’s stock price would collapse after the expected share registration was filed, seeking to profit from the move. Fund managers including Marshall Wace and Zazove Associates have been large holders of Trump Media’s warrants, according to regulatory filings. Those warrants have been trading at a much lower price than Trump Media’s shares, in part because they were yet to be registered and also because of the ferocious rally in the stock when it first began trading.
To profit from this difference, the funds shorted the stock, betting that it would fall once the warrants were registered, according to people with knowledge of the funds’ trades. Marshall Wace and Zazove declined to comment.
The trade helped drive a spate of demand from investors looking to bet on a decline in the company’s share price, making Trump Media one of the most shorted stocks in the United States. Even before the filing arrived, Trump Media shares had fallen more than 50% since their first day of trading after the merger, amid doubts about Truth Social’s ability to generate revenue and profit.
Last year, Trump Media lost $58 million on revenue of $4.1 million — all of it from advertising on Truth Social.
The warrants have also fallen sharply over the past couple of weeks, down roughly 50% since the start of the month.
Short-sellers bet that the price of a stock will fall by borrowing shares of a company and selling them into the market, hoping to buy them back later at a lower price, before returning the shares to the lender and pocketing the difference as profit.
Matthew Unterman of S3 Partners, a research firm, said a potential flood of new shares coming into the market would make it easier for short-sellers to bet against shares of Trump Media. At the moment, he said, Trump Media is one of the more costly stocks to short because the company doesn’t have a large supply of shares available to borrow.