SpaceX IPO

Okay. Matt, if you're hearing this, hopefully it means that we're recording. We haven't had a little glitch on on the start here. But I think we're in good shape. Happy Memorial Day weekend to you, Matt, and hope you like what we have to talk about here. Yeah. Three, two, one. Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal woes intersect and collide in real life. Anne and I are here for you. Anne is a law professor. Anne Lipton is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast. And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast. So our podcast is about activist investing securities law and Elon Musk. So so 'cause we're gonna spend this podcast talking about his latest adventure. it's out the S one for SpaceX. It's available. so I I d I don't know how much you've actually read the whole thing. I Apparently we should just retitle it. It's very exciting. I've skimmed and then read the parts that made like are in words and not in numbers. Right. I've read parts of it. and I've probably read scan skimmed a lot more than I read. 'Cause it's it's it's a big deal. Anyway. So, it's hundreds of pages long, with all sorts of stuff that kinda confirmed a bunch of things that were kind of rumored and there were know if there were some surprises, but there were some interesting things that go ahead. Hmm. I don't think any Yeah. I I I know I haven't seen anything that contradicted a rumor, you know, refined it more. Yeah, yes, there's nothing right, yes, right. But there were some you know, there's as with anything he touches, there's always some novel novel stuff that pushes the boundaries of not only securities law and corporate governance, but you know, just logic and and sense. So anyway, we're gonna talk about that today. So, and we'll talk about corporate governance, shareholder rights. There's always a twist. Yeah. Fair enough. All that stuff. First, just a reminder: we have a mailbag. You can email us shareholderprimacy at freefloat.lc. and then and then some of the financial elements. But first Right. Let us know what you think of the SpaceX S one once we're done ch taking it apart here. Though we could, man, we could spend ten shows talking about all sorts of d well, just on this S one, there's so much there. so just figuring out what to like talk about is takes takes a lot of selective curating. so anyway, SpaceX. The S one came out it's a it's in draft form. We probably will. I know. Yeah. It'll yeah. The draft, yeah. we knew about it a couple weeks ago because the confidential version was filed. and and Edgar and now the unconfidential, unred not even unredacted, just the draft form is out. So we we learned a lot about what the company plans to do for or really do to its prospective public shareholders. A couple other quick things. As we knew. The we call it SpaceX, but it's Space Exploration Technologies Corporation. So if you want to do an Edgar search, which I tried, and you type SpaceX, you'll you won't get it. You y you you won't find it. you will find its ticker, SPCX. and they decided to list in the NASDAQ, which I think everybody kinda knew. You won't find it, yeah. Everybody though that's why Nasdaq changed its rules for fast entry so that they would list on the Nasdaq. Right, right. So that was sort of an open secret that it was gonna be a Nasdaq listing, and not then I see. But anyway. and as everybody knew from two years ago, it's a Texas corporation. after moving from Delaware about a year and a half ago. I can't remember. Right after the Yeah, right after Tornetta decided took away his pay package, he moved his private companies to Texas. Right. So it remains a Texas corporation. So anything we talk about here legally is in the context not only of federal law, but Texas corporation law. Texas corporate law, right? So what do we got? What what Texas corporation laws do we have to do we have to address here? Mm, yep. Yeah. Okay. Well let's first yeah, so we'll start with corporate governance and some of the basics. So there will be three classes of stock, the A shares, the B shares, and the C shares. The thing about the C shares is they're authorized in the charter and apparently something like ten billion dollars of that looks like it's still being worked out. Ten billion shares, sorry. but there won't be any C shares outstanding. At this time. Right. They'll they're issuing those C shares at this time, but they're B authorized in the charter. The A shares will be authorized in the charter. Those are what they're selling to the public. And the B shares are going to be held exclusively by Elon Musk. And of course, they have different voting rights. So they all have the same financial rights, you know. If there are dividends, which there won't be, but if there are dividends, they all get paid the same dividends. If there's a merger, they all get the same consideration in the merger. I mean issue i they're they're issuing no C shares right now. there's a s if there's a split they they they get they all all the shares get split the same way. Right, okay. Yeah, it Yeah, exactly. So they're fan financially they're equivalent, but of course they have different governance rights. The A shares have one vote per share. Those are the ones that the public gets. The B votes, the B shares, which are Elon Musk's shares, they get 10 votes per share. So and so that gives him voting control. And the C shares, well, we'll get to their purpose, but they have no votes. they're non-voting, but they're not being issued at this time. So anyway, so they're they're not voting. Huh, interesting. He obviously is gonna have control of this company because he has the B shares and the B shares are 10 votes per share, but that's apparently not enough. He's really like gilding the lily on this. In addition to the fact that his B votes have 10 votes per share, there are special rights given to the B shares in the charter that are addition to this. So first, yeah, so this is on top of this. So first, when you vote for however many people are on the board, the B shares get to vote by themselves for half the board. wow. interesting. I didn't catch this. Okay. so there's there's there's there's directors by class. Okay. Or fi or fifty-one percent. Exactly. So there are gonna be like constituency directors who are only elected by the B shares, and that's actually fifty-one percent of the board. The remaining directors are all the shares voting together, A and B. But of course, since B has ten votes per share, the B will control that as well. So it's very s like he's really submitting his like it's not good enough that he has ten votes per share. He's gotta designate certain directors. More a majority of the directors have to be only be elected. And then also in the charter Is that as long as he's playing the role, which he is, of CEO and a director and chair of the board, he can only be removed from those positions by the B shareholder. So, like, for example, right yeah, although theoretically there could be more at some point. So, so I mean, so if you think about this, like the way you know it works technically is the board selects the CEO. So theoretically, there could be two seconds when the board that he controls. Yes. Which is him, it's one shareholder. Right. Kicks him out of CEO. That's not going happen, but I mean, in history, it has happened that sometimes controlling shareholders get into feuds with their directors. So just in case his board was upset and decided to kick him out of CEO, they actually can't because the only way he can be removed as a CEO or as a director or as the chair of the board is if the B shares vote in favor of it. Yeah. By a vote of the B shares. And and and they because of their ten votes per share, they have a dominant vote. I mean, however that works. Yeah. W well yeah, well on this, like the A shares don't even get a vote. But like they are like I mean, it's just it's unnecessary to have all this extra control. Now the number of B shares, yes, I know. It's just like he really wants to make sure there's no possible universe in which there are five minutes when the directors may not w may be able to get rid of him. Even though he could immediately then get turn around and get rid of the directors, he doesn't want to take the chance that there's a whole five minutes when he's not CEO. So it's it's a it's a vo it's a vote within the class of B shares. my god. Right, this is right yeah, there's Okay. Now, the number of B shares he actually has is kind of funny because he owns 4.3 billion B shares outright, and he has the option to purchase another 350 million B shares. But apparently that's not enough because there are these moonshot pay packages, we've all heard about them, where he gets more B shares if he meets the milestones. And what are the milestones? Well, it's complicated. He has to have reach certain market capitalization, he'll hit he'll hit the lower. Right. And operational. And there's operational ones. And operational. The the market cap, he'll hit those right away because it's like four hundred billion is the first tranch. He'll hit that right away. But he has to also hit operational milestones. And what are the operational milestones? A human colony of at least one million people on Mars. Okay. There are no the there's a different one. There's a separate package. There's a separate package with a different set. But this package, the operational milestone, is a human colony of at least one million people. Yeah. Well no, there ways that there's other operational milestones that it right. Right. okay. it's a single s one single part of the pair. interesting. Okay. And then the and then he gets more B shares with each market capitalization. So let us let us say I have my doubts about whether there'll be a human colony on Mars with at least one million people, but we can say that there won't be one soon. He will not hit these soon. Even though he hasn't and and with them he gets like, you know, up to you know, just I think it's like another billion dollars, another billion shares if he hits those milestones. But here's the thing. The board actually gave him those shares already. They awarded those shares to him already. They've been issued, and he can vote them now. He can't sell them because they're restricted until the one one million human colony is established on Mars, but he can vote them. There's also a separate pay package where he has to achieve market capitalization milestones, and those start at a trillion dollars a trillion dollars and go up to six trillion. And coupled with an operational requirement that SpaceX create. Non-Earth-based data cent data centers capable of delivering 100 yeah in orbit 100 terawatts of compute power per year. But those shares, another 300 million B shares, have also been issued and he can vote them. And both of these, even though he can't sell them and he can't pledge them for loans, he can pledge them for loans if the board approves. The board that is, of course, the people he put there. So, so both of the everything's like he doesn't get paid until he puts a million people on Mars. Well, tax Right, the right, the in orbit. His his people, right yeah. Yes, but he gets the voting power right now. So Yeah, and well yeah, and then there's the seashares, which I was gonna turn to. So so he's all right, go ahead. Right, yeah. Well, okay, let me make sure so A the A's are what you and I could go by, though we'll talk about that a little later Yeah. the bees are pretty much him alone. I don't think there's any other shareholders that have B shares at this. There weren't any listed, there weren't any listed on the preliminary. They're him alone. There are I don't think there are at this time. He can't and there but he but he can't what he can't do is like if he tries to sell his B shares, they become A shares. So there's no way to sell them except he can pass them on to his family. So his kids will get them. His brother could get them. Yeah. So I mean, so this is not like once he dies, they disappear. That's the way Google is set up. Once the founders die, there are no B shares anymore. But Right. All fourteen of them or whatever, right? Right. Not with Elon Musk. With Elon Musk you pass them on to his family. Right. and so so that was my question about this particular aspect of this, though we'll gonna talk about a coup another important part of governance in a second related to litigation. But before we depart from the ownership, the cap table as we say, what do you think what's the purpose of these C shares? What what do you think's going on with the C shares? Hmm. Yeah. That's the thing. The C shares, they're no vote shares. And I don't know for sure, but I know what they've been used for in other companies. They're used to pay employees or make acquisitions because that way the company can use stock to pay employees or make acquisitions without diluting founder control. So this became a real issue with Google. They went public with just one vote shares, the A's, and the 10-vote shares, the B's, but they kept acquiring companies using Google stock, Google A shares, and they paid their employees in Google A shares. And every time more A shares issued, that diluted the founder control just a little bit. So over time, it was looking like a there could be a point where they no longer had majority control. And they created a class of no vote C shares to deal with that. So my guess, though I don't know, is that the reason the C shares are there in the charter is so that at some future point, SpaceX, if it wants to make acqu stock acquisitions or pay employees and shares, it can issue C shares. It's not doing that right away. It's gonna acquire cursor. Yeah. Okay. I don't don't be so sure. It i it it could use the seashares to acquire Tesla. Well well it's it it's acquiring It could right. Yeah. If if the if shareholders vote in favor of that. cursor well they they really do have to vote in favor of it. But like Cursor, it's already been reported, it's in their filings that after the IPO they may acquire this company called and that's gonna be A shares. But right, yeah, the C shares could be for Tesla. you mean the Tesla shareholders? they will. Right. Right, they're gonna t Right. Right. I that's that's kind of my guess. And and when you say dilution, you're referring to dilution of voting rights, not dilution of economic value. Okay. Voting. Right. Right. No. The the C shares, the C shares have the same economic rights as all the other shares. Right, yeah. The C shares are just, you know, it's equivalent to A's and B's in terms of dividend, but splits or whatever. Yeah, if there were dividends, whatever, whatever whatever claim to profits, whatever profits exist, the C share share equally in the A's with the A's and the B's. All right, cool. so that's the cap table, which is really, you know, th that that was something people kind of speculated about, but this really confirmed and extended our knowledge of kind of the the economic structure of ownership that was really rumored in in ways that that we didn't know. Yeah. Well we yeah we well I I would have I mean I would have bet body parts it was gonna have dual clash shares a year ago, but we didn't know the exact It's so overwhelming. Yeah yeah. No right right. Exactly. But you know, the idea that he's I think his voting control at this point is and I don't know if this includes the grants which like eighty five percent or something. But yeah, but that includes the 1.3 billion that he hasn't earned, but they're letting him vote anyway. It does, it does. And and I I should mention, just you know, to remind people in case they've forgotten, the reason like this companies cannot go public with or sorry, they can't switch to dual-class shares after they're already publicly traded. Those are exchange listing rules, NASDAQ and New York Stock Exchange. So a Tesla, he wanted to get voting control, but once it had already gone public with single-class shares, there was That's okay, that was my question. Is that all right, cool. Right. Right. He could he couldn't put in a double cla dual class, right. Right, right. So SpaceX, there was no question was gonna make that mistake. Of course. So all right, so that's the captive. We'll actually return to that little while, when we talk about some of the broader investment implications of this. But anyway. All right. And then there was the other thing and we actually talked about this aspect, rumored aspect when we covered this was it three weeks ago? I can't remember. Yes. Yeah. Well we yeah, but but mostly we were talking about like just the implicate the legal implications of the leaks at all. Yeah. Yeah. So Right. Yeah, but we we we yeah, but we touched on the the litigation part of this or or or or or shareholders enforcing let's talk broadly, shareholders enforcing their rights. Using law. Yeah. So they're at like so losing l using litigation. There are, so let's just say that in general there are three kinds of claims shareholders bring. There actually could be more, but most of the time we're talking about three kinds of claims. So I want to distinguish between them. The first would be fiduciary duty litigation. That's state law, so it's Texas law. And those are usually a claim that the board had some kind of conflict of interest. Like in Delaware, a board beholden to Musk gave them a $56 billion pay package. So that's one kind of litigation. Another kind of litigation is federal law, Section 10B, and that's general fraud. That's for intentional or at least recklessly false statements. You have to show intent. and the th right, lying to shareholders intentionally or recklessly to boost the stock price usually. So misleading, basically lying to Right. About about your financials, about your business plans, about whatever. Okay. Exactly. And then the third kind is federal section eleven litigation. Now section eleven is usually for IPOs, like the IPO we're about to see, and it's about false information in a registration statement specifically. But one major difference between Section 11 and Section 10B is 10B, as I just said, you need to show intent. It's fraud. You have to show they intended to defraud you. Section 11, you actually don't need to show intent. If they have false information in the registration statement and it results in investor losses, Right. You can sue. So those are the yeah. Alright, so so so ten B and eleven sort of are similar behaviors, but a different kind of premise. Yeah, a different kind of premise. Exactly. Section eleven, you only in it's gotta be in the registration statement, but you don't have to show intent. Section ten B, it can be in any document at all, but you do have to show intent. So those are the three main types of litigation. not the only ones. I mean, like for example, every state prohibits fraud just under state law. But most of the time you don't see shareholders sue under state law fraud claims because it they're not really designed for public. Yeah, it it it's they're they're weird for public companies. So are shareholders gonna be able to sue under Got it. Okay. Sure. For public companies, right. Exactly. Right. Fiduciary duty litigation for conflicts, section 10b for fraud, or section 11 for false statements in the registration statement? Probably not. Okay. Yeah. Yep. Straight up fraud under section 10b. So so so so the the the headline here, and we'll explore this, is that a shareholder is unlikely to be able to sue for fiduciar breach of fiduciary duty under state law, unlikely to be able to sue for fraud, ten B fraud, and unlikely to be able to sue if this registration statement that we've are evaluating or looking at here has something wrong with it. wow. Exactly. Probably all those avenues are pretty foreclosed. So first of all, SpaceX is taking advantage of a provision of Texas law, which we've mentioned well actually no. That well, actually, there's a provision of Texas law, which to be fair is Delaware has the same thing, where the directors like Elon Musk are allowed to take corporate opportunities as long as they put that in their charter or their bylaws. So yeah. Yeah, yeah, exactly. So they put that in their charter. yeah. Right or this is and it was in there. I that I read, that I saw. We can take corporate opportunities. So let's say Elon Musk encounters a new business opportunity that would be good for SpaceX. Elon Musk is allowed to say, No, I'm gonna develop it privately so I get the full benefit, much like he did at Tesla with AI. And shareholders sue. Yeah. This is a loyalty problem. And shareholders sued at Tesla over that because they hadn't put that advanced opportunity waiver in their corporate documents. so this is this is a duty of loyalty problem. Right. And he took this AI opportunity and the shareholders sued over that, and I think they would have won, but we talked about this before it got dismissed because Tesla moved to Texas. So, but now he's putting it in the charter that he can take corporate opportunities. Plus, yeah, the yes. Yeah, an opportunity an opportunity is considered an asset of the corporation, he can just take it. then, and we've talked about this, is that Texas has a lot of general limits on shareholder litigation. So that's a specific flavor of the fiduciary the state level fiduciary duty claim. f f yeah, for d right. Okay. The main one being SpaceX will take advantage of a Texas law that lets it block any derivative action unless the shareholder holds 3% of the stock. So you have to own what apparently at reported numbers will be $52 billion worth before you can sue over a conflict. That's not gonna happen. SpaceX even warns about this. It's actually hilarious. This is I'm quoting the registration statement. The interests of Mr. Musk and entities owned by or affiliated with him may differ or conflict with the interests of our shareholders. They say we may enter into transactions with entities affiliated with Mr. Musk in lieu of pursuing other opportunities that some other shareholders may prefer, or that may prove to be more accretive than the opportunities we elect to pursue. Nothing you can do about it. Then there's federal law. So that's yeah, so state law, yeah. Mm. Okay. Okay, so so so so we've we've talked about two limits on the ability to sue, first for this huge potential conflict given that Musk Elon Musk has a has a w a vivid imagination and could get all into all sorts of stuff. And the basic threshold that in order to file a derivative litigation, derivative lawsuit, someone's gotta own three percent. Okay, and those are written in the c into into the charter, written into the bylaws. Yeah. Yeah. Yeah. Exactly. And they're written into Yeah. Texas allows it, so the likelihood of there being any kind of d litigation along these lines is next to none. Okay, go ahead. Exactly. And then we get to federal law. We start with section 11 claims, false statements in a registration statement. Now part of that has to do with section 11. you if there are false statements in a registration statement, the only way you can sue is if you show your shares were registered. You can't just say there was a registration statement, it was false. You have to show that your shares, the one that you obtained, were registered. Why does that matter? SpaceX already has a lot of shares outstanding that were not registered. They issued shares to the early investors. They issued shares to employees because the securities laws allow you to do that. You don't have to, you only have to file a registration statement if you're selling to the general public. Exactly. That's the whole point. Exactly. So they've been selling sh they've been selling shares to the early investors. They've been selling shares to the employees, you know, as payment for their compensation for years. And those earlier once those earlier issued shares Right, they're just Right. When you're when you're going public, that's the whole point of the IPO, right? We're registering the shares and selling Mix in with the shares that are available for public trading, the registered shares, there's no way, if you just buy shares of SpaceX, you have no way of knowing whether your shares were the registered ones or the early. Exactly, they don't, they don't, we don't keep track of them that way. Which basically means that you have no Section 11 claim. Once those early issue shares mix in with the registered shares, nobody who buys after that point can bring a Section 11 claim. Yeah, shares shares are fungible. You don't like y yeah, I mean you Right. Because because you'll be unable to prove that the shares that you bought from in in the open market from you don't know who you don't know who the seller was, you'll be unable to prove that these in fact were registered. exactly. Exactly. That's exactly it. And as far as I can tell, the SpaceX documents are a little tough to parse on this. But it looks like some shares may some of those early issued shares, some of them, especially to employees, may become available for trading on day one. And well, there's no employee lockup. There's there's a lockup for the some yeah, there they're not there's no there's no lock. For the NEOs, for the n for the For the yeah, for the and that and maybe some big investors, but there aren't lockups for the for the line employees. So if they got their shares a while back, they may be able to trade them right away. Plus, the lock see plus exactly there's a lockup. A lot of the insiders are not going to be able to trade right away. So at that point their shares aren't mixing in, but some of those shares are gonna be released from lockup right after the earnings the first earnings statement comes out. in yeah. Right. It's not not the six month lock up that we're accustomed to in an IPF. Yeah, yeah. It would like so some of those shares get and their earnings statement covers through like this is a an IPO that's gonna start at some point in June, and the earnings statement is gonna be after June 30th. So like it's really, I think, only a couple of weeks of trading before the lockup is partially released. So between that and the fact that some early shares held by employees may become available for public trading right away, nobody's gonna be able to bring a section eleven claim because they won't be able to show that their shares were the registered shares. Yeah. Right. Wow. All right. But there's more. There's a provision. They're not that's a bit Section 11, that's not enough. Like ever as I said, everything is like dual protections to make sure there's no possible way anyone can sue. There's a provision in the SpaceX documents that says if you bring these Section 11 claims, you have to bring them in the Texas business court, which is not the problem. And then it says that you have to bring them individually, not as a class. Yeah. Go ahead. On section eleven more on section eleven. Okay. These are federal this is federal law. Section 11 claims can be brought in state or federal court. So they're saying, well, you have to bring in in state court. That part is not particularly controversial. It's the part where they say that you have to bring them individually, not as a class, which means small shareholders who only have like small losses are not going to be able to bring claims if that's enforceable. It's not clear that it is, but it may very well be. So that's the Section 11 claim. Okay, fine. All right. Right. Right. Alright, so so any kind of misrepresentation or inaccuracies or problems with this massive this registration document and there's all sorts of other documents that people are gonna have as part of this issuance are pretty much proclaimed. Yeah. Pretty much under section eleven, if they're without intent, if you buy on the open market, you're just not gonna have a claim. But then we're left with the section 10B claims for fraud. That's where you have to show intent. Exactly. Well, first, SpaceX says you have to bring those in the Texas business court too. But that's impossible. 10 B claims can't be brought in the Texas business court. B the state courts can Right. For willful and di in intentional willful whatever fraud. All right, go ahead. For reasons that only are known to the 1934 and 1933 Congress, you can bring Section 11 claims in state court, but you can't bring Section 10 B claims in state court. But SpaceX says you have to try anyway. And then you have to wait for the Texas business court to say you don't have jury. Exactly. After that, you have to go to arbitration on an individual basis. No class actions, individualized arbitration. Now we had a whole show about securities arbitration before. okay. So this we can't do this. Right. Right, yes, right, right, right. But just really quickly, for a long time, the SEC's view was that if you required arbitration, that was so unfair to plaintiffs that it amounted to a waiver of their right to sue. And the SEC made it very clear that it would challenge those provisions. So no one even bothered trying it. This SEC decided, you know what, actually we're completely fine with arbitration. In fact, we encourage it. But still, so no but still no companies had except for one, the crazy oil and gas one, there no companies actually tried. To put arbitration provisions in their charters and bylaws. Until now. No, so but it's interesting why they didn't. Because it wasn't clear they'd fare any better in arbitration. Because, first of all, one purpose of arbitration is to do exactly what SpaceX is doing, which is require individual arbitration, one person at a time. If it's a consumer arbitration, that's a big deal for companies. Because like if you lost 30 bucks on like your ATT bill, you're not gonna bring an individual arbitration over that. Until now. No one's gonna do it. Yeah, right. With investments, even if most retail investors don't have enough losses to justify, there are always going to be some large and many large institutions who might. And companies or large individuals. Exactly. And if they have losses big enough, they're gonna bring them. And if they have to bring them individually in arbitration, what companies were facing was discovery, discovery, discovery, discovery with mass claims and a deposition, and then another deposition, and then another deposition as each individual investor went through. Or large individual holders who just own a few million dollars worth of shares. And they were kind of afraid of that. And the other issue that they didn't like is that right now in federal court, there are a lot of protections for companies if you sue in federal court. Basically, it's very hard to bring a securities fraud action these days. And a lot of them get dismissed right off the bat. And they were afraid that if they went to arbitration, those protective standards would go away. So they'd actually be facing more liability than they would be facing in federal court. So corporate boards seem to be leaning against arbitration. Because they like the idea of federal court where they have all these protections and where they could get rid of all the claims in one big exactly, like a pleading standards. The complaint has to be really detailed and so forth. But SpaceX, I think, may have come up with a hack to get around these drawbacks, to force arbitration that will actually avoid these problems. They selected the expedited arbitration rules of the International Chamber of Commerce. Those rules and really kind of procedural protections at this point. Yeah, right, okay. Allow for arbitration with a very limited record, essentially almost no discovery. So they don't have to worry about having discovery after discovery after discovery. Plus, SpaceX says in their bylaws, if more than three investors bring arbitration claims, only the first one gets arbitrated and the others have to be stayed. That way they can avoid having to deal with claim after claim after claim after claim. And then, SpaceX says, the arbitrators have to use the protective federal standards for evaluating claims. Okay. So they won't have to give up the advantages they have in federal court. The choice of procedure, exactly. So that's like the cho the choice of not I was gonna say choice of law, but the choice of procedure it is that the arbitrator has to use is the federal one for ten B. Okay. Is the federal is the protected. So there's gonna be a lot of question about how enforceable all this is, but I I gotta tell you, I worry because I think this is gonna spread. I think other companies are gonna see that this may be the way to avoid the drawbacks of arbitration and essentially kill Section 10B claims by investors. And I know a lot of people would say good because a lot of people think the 10 beef claims are frivolous or they think that they do more harm than good, that the few ones that are Correct are not worth all the frivolous litigation. and but I think we do not like a world where corporate executives don't fear the consequences of fudging their public statements. yeah, I mean, true we'll still have the SEC. The SEC could still bring claims, but the SEC has never been funded adequately to police the market. Congress has said it's relying on private actions to police the market. And we've said before, the SEC right now does not seem very enthusiastic about securities enforcement. Right. I at at least this SEC is not no no no It this SD. We had a whole show when we talked about SpaceX before where we talked about how they were like ignoring fairly easy red flags of illegal activity from SpaceX right off the bat. So I know there are lots of corporate executives who think this is a fantastic new world, but it's one that worries me. And I would and based and and I would I would wanna think hard. Well, we'll talk about that in a minute. About what ki w what kind what k what ki what what kind of invest what kind of investment this represents based on everything we've talked about. All right. All right. So we'll well why don't we take a look at that in a minute here at shareholder primacy. All right, a little break. Yeah. We'll talk about what sh investors should be thinking. Yeah, okay. We're good on Mm-hmm. Well, yeah, it's long, but just people but l people like listening to Well, that's I know we're we're gonna we're gonna be we're gonna be able to zip through the rest of this is pretty anyway. All right. over to you, Ann. Three, two, one, take it away. Welcome back to Shareholder Privacy. I'm Ann Lipton here with Mike Levin. And we are talking about what investors should be thinking. Mike, who when they're looking at this registration statement. Right. W about about the w well it's w we'll sort of like do this sort of activist angle, I suppose. because as an activist investment this one is is is a low priority, I will tell you that. For reasons we've talked about in terms of control, but there's other interesting nuggets here that are that we can sort of delve into for a little bit. and again, th this this this company this Okay. Yeah. Yeah. IPO, this registration statement contains multitudes. Okay. There's like so much we could kind of talk about. So we're gonna just kind of not necessarily cherry pick, but go at a few more of the high profile, more interesting kind of facts about this that would be relevant to an activist investor to investor. Now, again, in it's two hundred and twenty seven pages total, which is long. Okay. And there's and there's there's a whole there's another hundred pages, I don't know if a hundred pages of exhibits. Ha ha ha. Okay. Yes. And there are and there are exhibits and attachments. There's thirty eight pages of risk factors. I you may read th I never read risk factor. I probably should. I I I probably should. I skim the risk factors. There's sometimes some governance ones that sort of confirm what I know. Thirty eight pages of risk factors. I mean more than ten percent of the document, okay? see, that's my favorite part. They warn about grok making s children's sexual like material. Right, yeah. Yeah, exactly. And there's all sorts of which is a little unique here. There's probably dozens of pages of like pretty pictures of rockets and s and space. Yes. Right. And let's set aside all the very flowy language about the purpose of the company. You know, any good IPO and, you know, reg registration statement is gonna sort of state, you know, in very optimistic Yeah, artist rendering of life on Mars. They have an artist rendering of life on Mars. Yeah. and confident terms about what the company's gonna try to accomplish. Well, this takes it to a whole nother level about creating interplanetary life and redefining I mean, there's all sorts of stuff there that just makes you if if you're not taking yourself too seriously, makes you want to laugh at this. So so setting all that s aside, once you've kind of read it, no I my f my conclusion would be no sane person or investor Hmm, yes. That cares about their rights, as we've started talking about a little while ago, or probably about making any kind of solid return. on this investment would buy a single share of this IPL. Now that's easy for me to say because I'm not no one's no banker out there is, you know, calling me to say you want an allocation. I'm not calling a banker s you know kind of begging for one. This is this this interests me so little at this point. but w so we'll kind of cover the latter in a in a bit. And and and the two are connected. The whole idea that that you know this is basically Elon Musk's kind of baby Yeah. Okay. Yeah. Yeah. Yeah. And he can direct the allocation and the spending of billions and billions of dollars of of money in in ways that kind of really just kinda are are along his whims. It w would give any smart investor pause. Now, if you're an investor that wants to trade this, okay, if if Yeah, I mean there's the Keynesian Beauty Contest aspect of this, right? Right, exactly. Well, you know, if you're trying to do the you know, find a greater fool, yeah, sure you're gonna go get part of the allocation 'cause it's probably gonna get a bump. Y you know, but you know, IPOs lately have have kind of been had very mixed performance in terms of how they've traded like in the week or two after their first day. So Yeah. Right. I mean, the you imagine there's a lot of re we know, I mean, he's planning on corralling his retail fans. And I think a lot of people No the interesting thing though, I mean, I just it's interest I I think it'll bump, I think it'll be successful, but he's allocating so much to retail right off the bat that you wonder you wonder if that's gonna take some of the retail demand bump out, but we'll see. Yeah, there's a whole right. You might. Anyway, so and again, it's there's there's this company actually has three three they have three businesses and three disclosed segments. space exploration and they have different names for them, but basically the whole idea of launching and managing satellites and payloads and so forth, but the idea that they're, you know, relatively relatively successful space business is part of this. Hmm. No. Right. You know, and and they've got a good motor on that. There's only a couple, you know, there's Blue Origin, y you know, and they're big NASA contractor. So yeah. So that's a that's a decent business. 'Cause, you know, you forget how much heavily how heavily we rely on satellite technology to make things run in in in in this economy. Second business is the whole Starlink communication business, which of course is a cousin. Yeah. There are no real competitors. of the space business because it relies on all those satellites, but that's more like the selling of the the bandwidth and the maintaining of that kind of communications network. Those are two kind of very interesting and different and relative if you look at the financials, relatively successful businesses. The third business is XAI. Of course it's the old Twitter, it's which is X, and it's and it's a and it's as AI Yeah, well it includes yeah, it includes Twitter. It's a social media site. startup or whatever. And that's that's really the very interesting and not a very good way part of this business. Okay. Now, a couple other points about this. he will have, again, complete control over all this. So what gets allocated among these businesses and what gets h how much in particular gets spent on XAI is entirely up to him. Okay, there is absolutely no shareholder influence over any of this. You know, he's got eighty pri five percent of the votes. He only has about somewhere in the range of about forty percent of the economic interest though. Yeah, I'm just I can't I mean I guess we'll know more when like we know exactly how many shares they're selling, but yeah. Right. Yeah. Right, but that's actually that's a that's a huge number. So so, you know, his economic interest in this is you know, it's not like he's got, you know, five percent of the economics and eighty five percent of the control. and you know, for any one single human to have that much of one single comp one single enormous company is kind of breathtaking, but anyway. Right. Exac exactly. and then, you know, we talked a little bit about, you know, his incentives here, the exact comp. Right, no, that's true. Hmm. Yeah, I mean at Tesla he only has twenty percent, and since they don't have dual class shares, he's only twenty percent of the economic interest. But he can vote it right now. He just it it kills me. No no no investor that I've kind of followed or really I've talked to many people about this takes any of the moonshot package seriously. wait a sec. He can vote it, but in terms of in terms of whether that moonshot package creates any kind of incentive. Okay, at at at Tesla Yeah, no, of course. No, it's the it's almost like it does it's designed to give him extra voting power without act it without tethering it to anything. Right, right, right, right. You know, so so so no one no one views that as anything other than kind of window dressing just on, you know, to try to say, if you do this I'll have, you know, a trillionaire or whatever. unlike at Tesla, where we can debate and discuss and we have the legality and so forth, it's pretty clear that the moonshot package at Tesla did create an incentive for him for him to certainly that one did the twenty eighteen Right, for him to create just a shitload of value for Tesla shareholders. Okay? I think there's th that's not the case here. These his his his exec comp package here. In fact, it illustrates a problem with the Tesla package, which was the Tesla pack he we the idea in Tornetta and so forth is he worked as hard anyway. Okay? And the the because he owned twenty percent and so forth. No question. No question. No, because it I it Yeah. Yeah, that's what she found. It it no but it All right, and right, okay. I he'll he he now has forty percent of the economics here. Okay, this moonshot package is completely unnecessary. Is it's in this one there, it's a way of handing him additional votes. That is what it is. But yes, but but in terms of incentives, yeah. sh yes, in terms of control but in terms of in terms of in terms of creating an incentive to like, you know, make the space launches go better, to, you know, grow Starlink to, you know, control all of, you know, voice communication in the world. I don't know. it it's not it's not gonna be really an e an effective incentive package. Okay. there's a couple of other other interesting aspects of this kind of financially. Hm. Yeah. Yeah, he's got plenty of incentive. Yeah, you're right. Yep, nope, I agree. the valuation is and again we need to wait for the final thing to come out, but it's roughly one and three quarters trillion dollars. Okay, which normally I would, you know, gasp. And that will it will become the largest company to IPO. I think the biggest one before this was Aramco, the Saudi Arabian oil company. All right. but assuming that these numbers are work out, it's only gonna become Okay. the sixth or seventh biggest public company. You know, NVIDIA's five trillion, Apple's four trillion. Okay, so it's not, you know, it's not gonna be I mean, as IPOs go, on the other hand, SpaceX has been around over twenty years. Okay, you know exactly right exactly. And you know, in another world, SpaceX would have been public for fifteen years already. Yeah, I mean this is just the securities laws changed. They made it easier to stay private longer and if the secur if if if the National Securities Markets Improvement Act hadn't passed, yes. Sorry. Right. So anyway, so so so so the the valuation again, forgetting the valuation relative to the fundamentals. We'll talk about that in a second. You know, valuation of one point seven five trillion, huge company, really important, but not, you know, it's not gonna be the biggest company in the world. and they're planning on raising, this is what's really interesting, they're only issuing about five per I think four or five percent of the shares. Right. So so what's interesting is they're only gonna raise seventy five billion dollars. Yeah, they're gonna it's a relatively small float compared to the overall. out of this, which kind of confounds the purpose of IPOs. IPOs is is access to public markets so you can get capital so you can make investments and build a business. Mm-hmm. Right. Judy This is this is this is access to public markets so the insiders can sell. Right, right. This is this is basically and which it that's a legitimate you right right, e exactly to be able to give liquidity to employees and early investors. Certainly Musk doesn't care. He's not gonna be selling sh I yeah I don't think he'll be selling shares. he doesn't seem to have any need. R right, right, right. But but in terms of his own personal need for capital. Like, you know, he had to sell a whole bunch of tw of of of of Tesla shares to go by Twitter. No. It that is why people go public today. Right, yeah. Well he has A's and yeah. Yeah. No no no, he'll he'll borrow. Okay, I don't think this is th this is gonna be, you know, there's there's nothing there's nothing greater than, you know, interplanetary exploration at this point. I can't think of what else he'd want to sell shares to invest in. So that's the that's what's gonna happen there. And the sa and of the seventy five billion, it's pretty clear that twenty of it is being applied to retired debt that was taken on to by Twitter. Out of seventy five billion they're raising, twenty billion so b basically about a quarter of it. So yeah, tw tw twenty's going to retire the the loan. Yeah, something like that. So so the proceeds anyway, there's in a in a in an S one there's use of proceeds. And the use of proceeds section is kind of useless. You know, it's not it because the proceeds here relative to their business, the the hundreds of billions of dollars that they're investing every year, particularly in X A. I which we'll talk about in a minute. Yeah. Yeah. Yeah, and he very possibly. The the this IPO is is basically just to, you know, create a liquid market and for and again, I'm convinced it's because he wants to fold Tesla into this and have a single public vehicle for him to to do his stuff. All right. And that's where those C shares come from, which is why I'm glad we talked about that. So in terms of the economics of three businesses, we we again we don't need to go into a lot of detail about what's going on. Starlink makes a lot of money. Starlink is a is a reasonably or very profitable business. Okay. He's managed that aggressively. He's grown it well. you know, that's it's and it's pretty cool. You know, others have tried satellite vo voice and data communication and failed. Motorola tried this twenty years ago. Okay, and he is on he figured this out. You know, kudos to him for and and it's again, it's not just, you know, Yeah. helping, you know, consumers like me get better Wi Fi and Yon Ed flights, which is in fact what's happening. okay. You know, he's been helping, you know, impoverished countries get better access to broadband communication. Great. Okay. S the space business, the space business is kind of breakevenish. Maybe it makes a little bit of money. Again, the kind of inve you know part of the issue is Starlink's kind of piggybacked on this. Yep. Yeah. Just why it's able to make so much money. The space business is breakeven ish, is kind of you know, not great. there's th they're still not in a full revenue, you know, they're largely a government contractor at this point. you know, launching some satellites for other people. But so that business still has a ways to go in terms of making money. Okay, but it's you know, if if it were to IPO just on its own, it wouldn't surprise me. It probably wouldn't give but Right. Mm-hmm. the valuations. This brings us to XAI. XIA XAI is a hole in the money you a hole in the ground you dump money into. Okay. XAI is a loser. Twitter is doing half to two-thirds of the revenues it used to do. And that's after, you know, all sorts of boosts and all sorts of okay. The AI business is just incinerating no, yeah. Okay. So much and it's not that good. Okay. So much so that this deal with Anthropic, you know, they built all this extra infrastructure and the only the best way to monetize it was to sell it to another AI comp a competing AI company. Right. You know, they're gonna make I think it's it's eighteen million eighteen billion a year in rental fees from Anthropic for selling its compute. Okay. So X AI is is Yes. Yep. Because X because XAI doesn't have, you know, the use for it. Mm. just a horrible, horrible business. you know, there you know an anything's possible. Things change in the AI, and I don't follow AI that closely. Things can change a lot. So there's you know, who knows? In two years from now we could be talking about XAI, you know, dominating the AI marketplace in the way that Anthropic is now, and we thought GPT was going to, you know, two years ago. But for now Hmm. it's it's it's a loser. And what's so interesting is you look at the context for where these businesses are gonna go because he put in the S one this TAM. You know TAM total addressable marketplace? Okay, that's an old that's an old phrase from do you know where TAM came from? Do have any idea? Jack Welch, when he was a G E popularized it. I'm not sure he invented it. He may have like borrowed it from some B school professor. The total No. But it became very 'cause he what he what Jack Welch used to do is he used to challenge his business unit heads to dominate the total addressable market of their business. So and and there used to be this whole game that used to take place at G where you'd try to game the t the TAM to try to show you were in fact bigger than you were. Anyway. So he he so showed that the TAM for SpaceX. Hmm. Yeah. writ large, SBCX, is twenty-eight point five trillion dollars. Now he doesn't put any context, there's no calculation here. almost all of the TAM, like twenty-six of the twenty-eight point five trillion, is for X AI. Okay. It's all like say okay. Right. so so basically the entire marketplace that that SpaceX is and the reason they put the TAM in there is in part to show you can kind of grow into your valuation. That, you know, if you're valued at one point seven five trillion, you know, that there's room for the revenues, which, you know, are in the hundreds of billions right now, to to kind of grow into that. Okay. Again, almost like twenty six of twenty six billion trillion trillion, sorry, trillion with a T. Yeah. Right. of the TAM is for X AI, it's basically for artificial intelligence. And it's like enterprise applications or something like that. It's very vague. just for context, do you do you know what the TAM, what the GDP in the US is? It's thirty trillion dollars. So we we currently, you know, have the world's largest at least per capita economy. I think China's still I do not. But ours is about thirty trillion dollars of of GDP. That's the value of all the goods and services that we produce. And again, there's a bit of a timing issue. That's a the thirty trillion number would be a you know a twenty twenty-six number. I don't there's no time frame for the twenty eight point five trillion that Musk attaches. Yeah, but he's saying he's basically saying that the that the entire that the that the marketplace for SpaceX Of course. But he basically w the absorbed the entire US economy. is at some probably near term time frame going to be the size of the US economy, even though the US economy has a lot more than communication, space travel, and artificial intelligence. Still need to make homes. So anyway. So for all these reasons, I think that and again not not just from a you know governance and a you know shareholder rights perspective. Yeah. We people do still need to eat. But from a a shareholder value perspective, unless you're planning on just trading this, which I am incapable of doing. All right, trying to find a g a greater fool, I I I have my doubts that this is gonna this is gonna have a whole lot deliver a whole lot of value. That especially on the ec you know, given that so much of the company is dominated by the X AI business, you know, if this was just an IPO of space exploration in the Starlink, that would be pretty cool. Hmm. Yeah. Yeah. Yeah, yeah. That would be a really interesting and you know, not that XAA isn't cool. It's interesting in some really weird and unfortunate sad sad ways. But those two businesses together as a would be very novel and unique. You know, there's nothing really similar. Yeah, there's Boeing and, you know, some other aerospace companies. but no no no. Because his he's got these dreams of of an A of an AI business, he kinda kinda chunked it together. Eventually, I'm guessing that Tesla will be part of And that that would actually not be totally uninteresting given Tesla's competencies in like power management and batteries and so forth. You know, forgetting vehicles, that's they're not gonna do much there over time. So anyway, so that's that's kind of some comments about what kind of investment this looks like. There's a Okay. Yeah, well, I hear hedge funds are trying to snap it up, and I'm guessing they're thinking trading it. man. Well yeah, they're pri well, yeah, they're trying gonna trade it, but there's also, you know, there's some ego here. If you if you're able to say, I got I got a know, million share allocation, it means that, you know, you you were talking of you you got a good relationship with some banker Goldman Sachs. So anyway. All right. So that's what's going on with with the investment side of this combined with the r shareholder rights side, I think there's a lot to worry about. How's that sound? Anyway. Well, yeah. Piece of SpaceX. Yeah. For now, I'm sure there will be more, there always is. I think we've we've kind of killed this one, don't you think? Yes. Well well maybe maybe if the S if the when the final version of the S one comes out, all right, maybe after it after it launches we can kinda cover it for a little bit and sort of see what it looks like. All right, cool. Anyway, this is Shareholder Primacy. Hosted by Han Lipnan and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Anne is professor of law and the Lawrence W. Demuth Chair of Business Law at the University of Colorado Law School. You can find me, Mike, at Yeah. Okay. The Activist Investor, one word.com. And you can find Anne at law.colorado.edu. Our podcast is produced and distributed by FreeFult Media. Thanks for listening. We'll talk again soon. Let's stop this.