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On October 20th, 2021, Digital World Acquisition (DWAC) announced a definitive merger agreement with Trump Media and Technology Group. However, in early December, it was revealed that the SEC and FINRA were investigating the transaction as early as November. Does the SEC/FINRA have the legal authority to block a SPAC merger even if wrongdoing is found? My understanding is that mergers can only be blocked if they violate antitrust laws, and since that clearly isn't the case here, can the SEC/FINRA block the merger on other grounds? My understanding is that the SEC has never blocked a SPAC merger from going through and that the first time it ever issued enforcement measures, only fines were issued to the SPAC company (https://www.cov.com/en/news-and-insights/insights/2021/07/first-spac-related-sec-enforcement-action-targets-spacs-alleged-due-diligence-failures). If the wrongdoing is significant enough, could the SEC force the SPAC to replace its management, or is this not an issue to begin with considering the SEC will eventually have to let the merger go through once fines are issued and once the SPAC complies with securities laws? This is of course dependent on whether the SPAC is found to violate antitrust laws, but if that isn't the case, is it correct that the SEC/FINRA don't have the legal authority to block a merger?

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On October 20th, 2021, Digital World Acquisition (DWAC) announced a definitive merger agreement with Trump Media and Technology Group. However, in early December, it was revealed that the SEC and FINRA were investigating the transaction as early as November. Does the SEC/FINRA have the legal authority to block a SPAC merger even if wrongdoing is found?

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My understanding is that the SEC has never blocked a SPAC merger from going through and that the first time it ever issued enforcement measures, only fines were issued to the SPAC company

Maybe. The SEC explains at the link in the question that:

Yesterday, the SEC brought its first enforcement action against participants in a deSPAC transaction, in which a private company attempts to go public through a merger with a special purpose acquisition company (SPAC). The action demonstrates that a SPAC can be exposed to punitive SEC sanctions even as a “victim” of alleged misrepresentations by a merger target, if the SPAC’s due diligence is found to have been inadequate. SEC Chair Gary Gensler emphasized this point in the SEC’s press release announcing the action: “The fact that [the private company] lied to [the SPAC] does not absolve [the SPAC] of its failure to undertake adequate due diligence to protect shareholders.” Notably, the SEC brought the action before the closing of the deSPAC transaction

I don't think that you are quite right when you say:

My understanding is that mergers can only be blocked if they violate antitrust laws, and since that clearly isn't the case here, can the SEC/FINRA block the merger on other grounds?

In the U.S. anti-trust enforcement is vested mostly in the Fair Trade Commission (FTC) rather than in the SEC or FINRA. Operationally, once the relevant agency makes a decision, the lawsuit would be brought by the antitrust division within the U.S. Justice Department. The other agencies including FCC, DOD, Energy Department, Homeland Security, and the State Department also sometimes have a say, but neither the SEC or FINRA usually do. Anti-trust law is designed to prevent abusive monopolies and unfair competitive practices like pricing goods or services at below costs in order to increase market share.

But, the SEC wouldn't be seeking to enforce anti-trust laws. The SEC would be seeking to enjoin a transfer that violates securities laws, which protect investors from fraud and market manipulation. The SEC asserts that the manner in which the offering of stock was made in connection with the proposed merger is illegal because it violations securities laws and/or securities law regulations.

The SEC does have authority to enjoin an illegal stock offering, or, other conduct related to the securities markets, for example, an improper proxy context, that violates SEC regulations.

Indeed, as of January 1, 2021, in response to a U.S. Supreme Court ruling that limited the SEC's authority, Congress passed a bill (attached to the National Defense Authorization Act) that increased the authority of the SEC to seek such relief. This new bill extends the statute of limitations for the SEC to obtain "any equitable remedy," including injunctions, bars, suspensions, and cease-and-desist orders, without any showing of intent or knowledge of wrongdoing.

If the wrongdoing is significant enough, could the SEC force the SPAC to replace its management,

Replacing the management of a company when the managers were previously not disqualified from serving in that role, would not normally be a remedy available to the SEC, unless the managers were convicted of criminal securities fraud, and hence unable to serve in management because of that conviction, or something similar. Merely planning to conduct a transaction that would violate securities laws if consummated, with advanced notice to the SEC of the proposed transaction, would probably not qualify for this kind of remedy.

or is this not an issue to begin with considering the SEC will eventually have to let the merger go through once fines are issued and once the SPAC complies with securities laws?

The SEC could fine the company before or after the merger if it violated securities laws, but that wouldn't prevent the SEC from enjoining the merger on the grounds that going forward with it would violate securities laws. The remedies are not necessarily mutually exclusive, and often an injunction that prevents a violation from being consummated in the first place would be a remedy that is preferred to a fine.

This is of course dependent on whether the SPAC is found to violate antitrust laws, but if that isn't the case, is it correct that the SEC/FINRA don't have the legal authority to block a merger?

The SPAC isn't being attacked on the ground that it violates antitrust laws. It is being attacked for the lack of due diligence and disclosure that occurred in connection with the transaction that was made possible by virtue of its SPAC structure. A restructured version of the same transaction that complied with SEC regulations for due diligence and disclosure might very well be allowed and would not necessarily violate antitrust laws. Indeed, superficially, a violation of antitrust laws in this case seems unlikely.

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  • Thank you for providing such a detailed and well thought out response!
    – user27343
    Commented Dec 16, 2021 at 17:06

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