Insight: How a China-based dealmaker got shell company for Trump's deal off the ground

Rm2 International

10/02/2022 11:00

* ARC Group played deeper role than simply advising SPAC in
Trump’s deal
    * ARC offered $2 million in capital to get the SPAC off the
ground
    * ARC recruited executive who put Digital World together

    By Echo Wang and Michael Berens
    Feb 10 (Reuters) - A China-based financier, once reprimanded
https://www.reuters.com/legal/litigation/trump-media-deal-partner-advisers-were-reprimanded-by-sec-2021-10-29
 by U.S. regulators and barred from taking his company public,
played a bigger role than is publicly known in the shell company
that agreed to merge with former President Donald Trump’s new
social media venture, Reuters has learned.
    Little has been disclosed about the involvement of the
financier, Abraham Cinta, and the Shanghai-based investment bank
he leads, ARC Group Ltd, in the shell company’s regulatory
filings. ARC is listed as “financial advisor” to Digital World
Acquisition Corp, the special purpose acquisition company (SPAC)
that signed a deal https://www.reuters.com/legal/litigation/trump-media-deal-partner-advisers-were-reprimanded-by-sec-2021-10-29
 in October to merge with Trump’s new media platform. No details
are provided in the filings other than that ARC could help the
SPAC with contacts in government and the business world, as well
as access to a “quality deal pipeline.” 
    Now, new information - text messages, a financial document
outlining proposed terms of the shell company, an agreement
between ARC and one of Digital World’s creators, and interviews
with five sources familiar with the situation - shows that Cinta
and ARC did not just advise Digital World. They also offered
money to create Digital World and recruited an executive to help
put the company together.
    ARC offered to provide at least $2 million to three
businessmen to form Digital World, the SPAC that went on to
merge with Trump Media and Technology Group, and Cinta had a say
in how the SPAC’s management team would be compensated,
according to the financial document and text messages between
Cinta and others involved. 
    A person familiar with the matter said ARC eventually made
an investment in the SPAC that became Digital World. Reuters
could not confirm whether the investment was for $2 million, as
ARC originally discussed. The initial investors in the
management entity, or sponsor, of Digital World put in a total
of $11.8 million, disclosures show. 
    The Washington Post https://www.washingtonpost.com/business/2021/12/23/trump-spac-deal-sec
 and Bloomberg News https://www.bloomberg.com/news/articles/2021-10-24/meet-the-mexican-dealmaker-in-shanghai-behind-trump-s-spac-deal
 previously reported that ARC has a stake in the sponsor of
Digital World. The fact that ARC offered money to get the SPAC
off the ground is reported here for the first time.
    Cinta and spokespeople for ARC and Digital World did not
respond to requests for comment.     
    Reuters could not establish whether Trump had any role in
creating or shaping Digital World or how much Trump knew about
Digital World’s backers when his company signed the deal with
the SPAC. Trump Media & Technology Group spokespeople and a
Trump spokesperson did not respond to requests for comment. 
    ARC’s deep role in the deal is atypical for a financial
advisor, which is the term used to describe ARC in Digital
World’s regulatory filings. An advisor usually counsels a SPAC
on how to put a deal together, but doesn’t ordinarily seed the
SPAC with capital or get involved in determining its senior
ranks. There are no U.S. rules against such arrangements and no
requirements for disclosing them, however, according to two
capital markets lawyers and two finance professors interviewed
by Reuters. 
    The details about ARC’s role shed new light on the financial
firm behind the former president’s lucrative Digital World deal.
ARC has carved out a specialty in funneling overseas money into
Wall Street’s boom in SPACs. SPACs are listed shell companies
that raise cash to acquire and take public a private company,
allowing targets to sidestep the stricter regulatory checks of
an initial public offering. The gold rush https://www.reuters.com/business/finance/how-wall-streets-hottest-dealmaking-trend-fizzled-2021-09-16
 has been fueled by many mom-and-pop investors placing risky
bets that often turned sour.
    Digital World’s activities are coming under regulatory
scrutiny https://www.reuters.com/business/media-telecom/spac-tied-trumps-social-media-venture-receives-us-regulatory-inquiries-2021-12-06.
 The Securities and Exchange Commission and the U.S. Financial
Industry Regulatory Authority have made inquiries to Digital
World about the circumstances around the deal, according to a
regulatory filing. The SEC is looking into Digital World’s
policies and procedures relating to trading, as well as the
“identities of certain investors” in the SPAC and where the
money came from. FINRA has asked for details about "surrounding
events," including a review of trading that preceded the
announcement of the SPAC’s merger with Trump’s company, Digital
World has disclosed. 
    The SEC and FINRA have not taken any action, and the
agencies declined to comment on their inquiries. 
    Many questions remain unanswered about the deal, including
the origin of the bulk of the $11.8 million in funds used to set
up Digital World. That stake would now be worth $705 million,
according to Reuters calculations based on regulatory filings.
    The $2 million that ARC proposed ponying up was to come
through a Singapore-based fund that Cinta’s firm managed,
according to the financial document with the proposed terms seen
by Reuters. 
    Besides the money ARC would invest with its Singapore fund,
two investors from Israel, blockchain entrepreneurs Stas Oskin
and Sebastian Stupurac, would put in an additional $350,000,
according to the document, whose digital signature lists Cinta
as its creator. 
    Stupurac confirmed his participation in a text message to
Reuters and said he recalled a different investment figure. He
declined to disclose what his investment was and said that “all
information should be public at some point”. He added he agreed
“to sponsor the idea” because he believed in the SPAC’s
management team, but did not get involved in its unfolding and
did not follow subsequent events. He declined to provide more
details.
    Oskin did not respond to requests for comment. 
    As part of the deal, ARC would have veto power over any deal
the blank-check firm pursued, the document shows. Reuters could
not establish the identity of the investors in the ARC Singapore
fund that offered to invest in Digital World, or whether ARC
secured veto power.
    Securities regulations do not require Digital World to
disclose the investors behind its sponsor. Digital World lists
the sponsor in regulatory filings as a Delaware-listed company
called ARC Global Investments II. The filings don’t say whether
that entity is affiliated with China-based ARC. The papers list
Digital World chief executive Patrick Orlando as the “managing
member” of ARC Global Investments II. 
    Orlando did not respond to requests for comment.
    Digital World’s merger with Trump Media has been immensely
lucrative for shareholders thus far. Trump has yet to launch his
social media product, and industry analysts have questioned
whether it can take on established platforms such as Facebook.
    Investors have snapped up shares in Digital World
nonetheless, making it the best-performing SPAC of all time.
Trump’s company, worth $875 million when the deal was inked in
October, is now valued at up to $10.6 billion.
    Other U.S. SPACs that ARC has worked on have underperformed
peers. The average share price of 18 ARC-affiliated SPACs,
excluding Digital World, stands at $9.45, below their $10
initial public offering price and the SPAC industry average of
$9.88.
    
    “THE DEAL HAS CHANGED”
    Cinta’s early forays into public markets struggled. A former
official at Mexico’s Ministry of Welfare, Cinta and several ARC
colleagues were reprimanded by the SEC https://www.reuters.com/legal/litigation/trump-media-deal-partner-advisers-were-reprimanded-by-sec-2021-10-29
 in 2017 for misrepresenting businesses they tried to take
public and making false statements about their affiliation with
them. In a rare move, the SEC stopped them from taking those
companies public at the time. 
    Cinta and the SEC didn’t respond to requests for comment for
a Reuters report on the matter last October.
    The financiers soon repositioned themselves as investment
bankers in China and turned to SPACs as a new way to take
companies public, a review of their deals shows. 
    In creating SPACs to list in the United States, ARC often
looks for American executives to become managers, and raises
money from investors in China and other foreign countries to
provide the initial capital needed to launch them, according to
regulatory filings and five people familiar with the matter.
    In a 2020 marketing presentation that has since been removed
from its website, ARC stated it “was able to craft a Wuhan-based
SPAC sponsored by a family office, structured by ARC in
Singapore, to allow our client to enjoy the flexibility and
benefits of the U.S. financial markets.” 
    The SPAC, Yunhong International, led by Orlando and backed
financially by Chinese businessman Yubao Li, liquidated last
year, citing its “inability to consummate an initial business,”
according to regulatory filings. 
    Li did not respond to requests for comment.
    ARC became involved in Digital World when a Singapore-based
ARC executive introduced Cinta to Daniel Santos, a blockchain
consultant and entrepreneur in the city-state in 2020, a source
familiar with the matter said.
    Santos signed a deal with ARC in September 2020 to connect
ARC with executives who can form SPACs, according to a copy of
the agreement seen by Reuters. In a hypothetical example of a
$50 million SPAC, Santos would get up to $97,500 in fees plus
20% of the shares in the SPAC that ARC would receive, the
agreement states.
    Santos was discussing launching a SPAC with two executives
in the U.S. video gaming industry, Lee Jacobson and Brian Fargo,
according to the document, text messages and people familiar
with the matter. Jacobson and Fargo sought capital - $556,090,
according to a regulatory filing – to launch the SPAC. 
    It was eventually decided that Jacobson, the head of a San
Diego-based gaming company called Robot Cache, would be CEO of
Digital World, while Santos and Fargo would be board directors,
according to the document and a regulatory filing. In return,
the three executives would get thousands of shares in the SPAC,
the text messages and the financial document show.  
    Jacobson and Fargo didn’t respond to requests for comment. 
    In July 2021, Cinta told Santos that Santos would no longer
be part of Digital World. “The deal has changed… new owner, new
board and management, but I’ll make sure we get shares for you,”
Cinta told Santos in one of the messages seen by Reuters.
    Jacobson informed Santos that Jacobson’s role had changed
from Digital World CEO to board director. Orlando, a Miami
businessman whom ARC had worked with on another SPAC, succeeded
Jacobson as CEO of Digital World. 
    “Somebody else runs it now. We shall see how it all shakes
out as I am still on the board,” Jacobson said in one of the
text messages. Santos never received any Digital World shares or
compensation for putting the SPAC together, one of the sources
said. 
    Orlando did not respond to requests for comment. Reuters
could not learn what led to the changes in the management team
and what role ARC played in them.

 (Additional reporting by Krystal Hu in New York, Chris Prentice
in Washington D.C. and Anirban Sen in Bangalore; Editing by Greg
Roumeliotis and Edward Tobin)
 ((ed.tobin@thomsonreuters.com;))