After markets closed on the eve of the July 4 holiday, former President Donald Trump’s social media company made a revelation that received little attention.
“The Company has entered into a reserve stock purchase agreement,” Trump Media & Technology Group, the company behind Trump’s Truth Social platform, said in a filing.
The jargon represents a major step forward that allows Trump Media to create and sell up to $2.5 billion in new stock. Securities experts say the plan is a way for the company to convert its astronomical paper value into real cash. That could provide a financial windfall for Trump, who owns a majority of the company. Even if enthusiasm for the stock wanes, his company could still hold on to billions of dollars in cash value.
Trump Media has seen its paper value soar into the billions despite financial losses and near-zero revenue, thanks to the enthusiasm of Trump supporters betting on the former president’s return to the White House.
Trump’s nearly 60 percent stake in the company represents the majority of his personal fortune, according to Forbes estimates.
Any stock sale by the company, experts say, could help the former president address two issues that have prevented him from turning what is currently a $4 billion stake in the company into something more tangible. A so-called “lock-up” agreement prevents Trump from personally selling his shares in the company until the end of September. Even after that date, many observers believe that a decision by Trump to sell shares could be interpreted as a vote of no confidence in the company by its owner and namesake, scaring off other investors and triggering a selloff that would send the company’s stock price plummeting.
Trump Media declined to answer detailed questions from ProPublica, including whether the company intended to limit public attention by announcing the deal just hours before the holiday.
“These wild and absurd conspiracy theories about TMTG’s routine and transparent business practices constitute actionable defamation, and we will pursue legal action in response,” a Trump Media spokesperson said in a statement.
The spokesman did not immediately respond to a follow-up question about the statement.
Shares in a company are actually pieces of a pie. If a company wants to raise money, it can re-slice the pie, creating more pieces but reducing the existing ones. The percentage of ownership in the company represented by each share decreases.
There are several ways for a company to raise money by selling shares. The traditional version involves the company using an investment bank like JP Morgan to act as a middleman. The bank finds large investors like pension funds to buy the company’s new shares.
Trump Media has chosen a different path, more common with small, high-risk companies known as penny stocks and so-called meme stocks, whose shares are the subject of Reddit-fueled hype and speculation from retail traders, experts said.
This alternative route is attractive to companies that might be seen as too risky by major investment banks or that believe demand for their shares will be fueled by a fan base of retail traders.
Instead of hiring JP Morgan or another bank, Trump Media struck a stock deal with a small New Jersey financial firm called Yorkville Advisors.
The company has made similar deals with a number of smaller biotechs, such as one that’s trying to develop “cannabinoid-based pharmaceuticals” to treat autism and Alzheimer’s disease. In 2021, it signed a high-profile deal with an electric vehicle startup called Lordstown Motors, whose stock has plummeted from a high of over $400 to less than $2 today.
Companies like Yorkville that make these kinds of deals typically have no intention of holding onto the shares, experts said. They act as middlemen, making it easy for Trump Media to sell shares whenever it wants. The basic arrangement works like this: Trump Media has the option to sell its own Yorkville shares for up to $2.5 billion, a significant chunk of its current market value. Yorkville gets a commission up front, and if Trump Media decides to sell shares, Yorkville also gets a 2.75 percent discount on the market price. Yorkville would typically turn around and immediately sell those shares to other buyers, pocketing the difference.
In the July 3 press release announcing the deal, Trump Media CEO Devin Nunes, a former Republican congressman, suggested that any stock sale would be used to purchase assets to grow the company’s business. “We have entered into an important agreement to secure access to additional capital, if needed, to pursue large strategic opportunities as we seek to grow our portfolio by acquiring assets and technologies in the Patriot economy,” he said.
Xavier Kowalski, a securities lawyer and professor at the University of Florida, said that even if Trump Media didn’t spend the money it raised to expand its social media business, “you could think of it as a diversification strategy: diversifying away from Truth Social and just becoming a source of cash.”
The company would have no obligation to spend the money to buy an asset. It could distribute money to shareholders — including Trump — in the form of dividends, for example.
Kowalski and other experts said Trump Media would follow other meme stocks if it decided to sell shares. “Is that what I would expect from a company that’s losing money and a stock that most people consider overvalued? Yes,” he said.
Yorkville did not immediately respond to a request for comment.
The ultimate impact of the deal on existing shareholders is unclear. Creating new shares means their shares represent a smaller percentage of ownership in the company. But if Trump Media uses the money to, say, buy a company that generates significant profits, it could create stability for Trump Media’s value over the long term.
Other meme stocks have taken similar approaches, with mixed results. The CEO of AMC, the movie theater chain whose shares soared during the pandemic on a Reddit-fueled buying frenzy, defended the issuance of new shares: “Now, if you were thinking — well, dilution is bad. Well, you were wrong, because stupid dilution is bad. Smart dilution is smart. And our stock price went up.”
But stock-diluting transactions often hurt existing shareholders. In its filing announcing the deal, Trump Media acknowledged: “The sale and issuance of shares to Yorkville involves substantial risks to shareholders. … These risks include the potential for substantial dilution and a significant decline in the Company’s stock price.”
At least in the short term, the deal appears to have had that effect. The company filed another filing for the deal on Monday, and it appears to have caught investors’ attention, with shares falling about 10% in after-hours trading immediately following Monday’s announcement.
Alex Mierjeski contributed research.
Do you have any information about Trump Media that we should know? You can contact Justin Elliott by email at (protected email) or by Signal or WhatsApp at 774-826-6240. Robert Faturechi can be reached by email at (protected email) and by Signal or WhatsApp at 213-271-7217.