• DWAC rises 9.3% in Wednesday premarket.
• Digital World Acquisition Corp says it is cooperating with SEC.
• Trump social media company may fail to merge with SPAC.

Digital World Acquisition Corp (DWAC) stock has decided to rally a surprising 9.3% in Wednesday's premarket a day after shares plummeted 28.2% on news that the Securities & Exchange Commission (SEC) was expanding its probe into DWAC's proposed merger with former President Donald Trump's Trump Media & Technology Group, which owns the Truth Social media platform. The SEC wants to know if DWAC, a special purpose acquisition vehicle (SPAC), had begun negotiations with TMTG before DWAC went public, because doing so would be illegal.

Wednesday's premarket rally appears to be in response to Digital World Acquisition releasing a statement that it is cooperating with the SEC.

"Digital Word appreciates that the Securities and Exchange Commission (the "SEC") is tasked with protecting investors and is working to provide the SEC staff with information, pursuant to previously disclosed subpoena requests, so that the SEC has what it needs to conduct and conclude its investigation. The Digital World team continues to diligently work towards completing the Business Combination, which includes approximately $1.25 billion of net proceeds to TMTG at close, assuming no redemptions by Digital World stockholders, in order for investors to have the opportunity to participate in the Business Combination," the DWAC statement reads.

The filing from Monday shed light on a new subpoena not covered before on a filing from May 31. The more recent subpoena appears to show the SEC more closesly scrutinizing the merger.

This subpoena seeks additional documents and information with respect to, among other things, communications regarding and due diligence of potential targets other than TMTG, relationships between and among Digital World (and/or certain of Digital World’s officers and directors) and other entities (including ARC Global Investments II LLC (the “Sponsor”) and certain advisors, including Digital World’s underwriter and financial advisor in its initial public offering), the holders of ownership interests in the Sponsor, certain elements of the transaction history for equity in the Sponsor, and certain forward-looking information about TMTG referenced in the Registration Statement. Any resolution of the investigation could result in the imposition of significant penalties, injunctions, prohibitions on the conduct of Digital World’s business, damage to its reputation and other sanctions against Digital World. In addition, the Section 8(e) order of examination of the Registration Statement can be expected to delay effectiveness of the Registration Statement, which could materially delay, materially impede, or prevent the consummation of the Business Combination.

That last part is key. Preventing "the consummation of the business combination" would mean an end to the merger and mean DWAC was once again worth the initial investment – i.e. $10.

DWAC Stock Forecast: We're going to $10, folks

The chance of the merger not happening is fairly high, maybe as high as 50%. The SEC has rarely scrutinized SPACs during the past three years they have been popular. Even if the merger does go through though, do not expect a quick turnaround.

As we wrote back on February 17:

At its current price, DWAC is priced at $3.2 billion. The closing of the merger, however, means that a 30-day clock begins. When the 30 days post merger is up, then separate shares allotted to insiders, underwriters and private investors who invested in the SPAC's separate PIPE deal (Private Investment in Public Equity) before the merger closed can begin trading their shares. This means that the current 37.2 million or so shares available to trade will grow overnight to more than 170 million.

"On top of that there are some 40 million "earnout" shares that get minted to company insiders and owners like the Trump family if the share price remains above $15, $20 and $30 a share in the month after the merger. The math is complicated, and the share count could change for a host of reasons, but one prominent forecast making the rounds estimates there will be over 193 million shares post-merger. This does not even include warrants that could add an additional 15 million shares in September.

At least one short-seller thinks DWAC is primed to drop post-merger and issued a $36 price target. That target seemed quite low back at the start of the year but now is above the current share price close on Tuesday. Support at $35 to $37 has broken down, and with little if any support underneath there, investors or traders should expect this one to head back toward $10. The $35 to $37 range should now be seen as resistance.

DWAC daily chart