Credit: Gage Skidmore | Wikimedia Commons
Truth Social, developed by the Trump Media & Technology Group (TMTG), represents former President Donald Trump’s foray into the social media sphere. The platform was designed to foster a social media environment that encourages “open, free, and honest global conversation without discriminating on the basis of political ideology”—a concept that appealed to many investors.
The recent decision to take Truth Social public through an initial public offering (IPO) was propelled by the opportunity for Trump, a 90 percent shareholder, to raise significant capital and enhance its market visibility. Merging with Digital World Acquisition Corp., a special purpose acquisition company, allowed Truth Social to list on Wall Street in a relatively expedient manner. However, the decision to bring Truth Social public has been anything but steady.
Post-IPO Volatility
The period immediately following an IPO is often characterized by pronounced stock price volatility. This phenomenon has been illustrated by Truth Social, whose IPO attracted considerable media attention and public interest due to its association with Trump. Post-IPO fluctuations can be attributed to several factors:
Market sentiment heavily influences stock movements during the IPO period. Initial excitement can drive up stock prices as investors rush to buy shares, but this can reverse just as quickly if sentiment shifts. Fervent followers of the former president, eager to support and show their devotion, gobbled up shares and drove up the social media platform’s initial stock price.
Regulatory and legal challenges can also destabilize stock prices. News of investigations or major lawsuits can create uncertainty among investors. Truth Social’s journey through its IPO is no exception, as it has grappled with regulatory scrutiny and legal complexities. Recently, Truth Social co-founders Andy Litinsky and Wes Moss have sued the former president and TMTG claiming that their shares were unfairly diluted.
Share Dilution Lawsuit
When a company is raising initial capital to grow, there are certain principles in place to ensure early shareholders keep a comparable percentage of control or value in the company. Anti-dilution protection, tag-along rights, and preemptive rights are all used to help safeguard the value of shares from early investors. These categories are heavily negotiated when a company is seeking funding because it could hinder a company from issuing additional shares in the future.
Anti-dilution provisions are useful for protecting preferred stockholders from losing large portions of their ownership percentage if a subsequent round of funding results in a lower valuation (also known as a down-round). Whenever a company issues additional equity, existing shareholders give up some of their ownership percentage in the company to allow the company to raise money. Legally speaking, if the shareholder agreement has safeguarding provisions for share dilution, a company is within its rights to issue more shares. Usually, shareholders are willing to do this because the dilution creates more value for the company. However, there are instances where the value created for the company is not proportional to the value created for the shareholder.
Facebook’s conflict with its co-founder is a well-known illustration of how share dilution can affect a shareholder's value. Facebook shares originally consisted of 65% for Mark Zuckerberg, 30% for Eduardo Saverin, and 5% for Dustin Moskovitz. After conflicting views of Facebook's future emerged, and changing Facebook's structure from an LLC to a C-Corp, Zuckerberg convinced Saverin to renounce the voting rights of his shares in exchange for 3 million shares in the newly branded Facebook C-Corp. Zuckerberg then used these voting rights to issue 9 million more shares for active employees of the company, which significantly diluted Saverin. His share of the company shrunk to 10%. Saverin eventually sued on a dilution theory and settled for an unknown amount.
Similarly, Truth Social is being sued by its former co-founders to bar Donald Trump from diluting their shares. Litinsky and Moss, 8.6% equity owners of Truth Social, have alleged their shares would be unfairly diluted by increasing the total number of authorized shares in the firm from 120 million to 1 billion. The complaint, filed in the Delaware Court of Chancery, alleges that the attempted dilution would result in the co-founders’ ownership shrinking from 8.6% to less than 1 percent. At this stage in the litigation, it is unknown how Trump is planning to dilute their ownership. Absent any anti-dilution protection in their original agreement, there is a significant risk that their share in the company will be reduced drastically over the issuance of additional shares.
Why Delaware?
Like many corporations (93 percent of all U.S-based IPOs), TMTG chose Delaware as its legal home because of its sophisticated corporate law. Delaware’s General Corporate Law (DGCL) is one of the most advanced and flexible bodies of law in the nation. This legal framework is designed to provide a robust structure for the governance and operation of corporations. The DGCL includes detailed provisions on the rights and responsibilities of directors, officers, and shareholders.
The state’s Court of Chancery also plays a pivotal role in why businesses prefer Delaware. This court is a non-jury trial court that specializes in corporate law disputes and is known for its rapid resolution of cases. The predictability and expertise of the Court of Chancery allow corporations to rely on the consistent application of law and principles, reducing the risk associated with legal uncertainties.
Conclusion
As Truth Social navigates its post-IPO era, it faces not only financial challenges but also legal hurdles. The outcome of the Litinsky and Moss suit is uncertain, and recent actions by Trump against the co-founders in Florida state court only compound the complexities. If Trump is able to win the dilution lawsuit, then even more shares will be issued to investors at the expense of Truth Socials’ co-founders. Looking forward, the platform’s ability to stabilize its operations and resolve its pressing legal issues will be critical in determining its future value post-IPO.
*The views expressed in this article do not represent the views of Santa Clara University.