Elon Musk’s space, satellite and artificial intelligence (AI) conglomerate SpaceX is drawing growing controversy as it pushes ahead with an initial public offering (IPO). The exchange revised its rules to accelerate inclusion in a benchmark index that mechanically channels capital, while the retail investor allocation has been raised to 30% in consideration of the “Musk fandom.” As a result, critics say institutional investors’ role in valuing the company has been weakened, leaving retail investors to bear the full brunt of post-listing volatility risk.
According to Bloomberg on Monday (local time), SpaceX plans to raise $75 billion through a listing this month. That is more than double the previous record of $29.4 billion set by Saudi Arabia’s Aramco in 2019. The target valuation is at least $1.8 trillion.
The issue is the retail investor allocation set up to gather fan support. Retail investors will be allotted up to 30% in this IPO, more than three times the typical share of around 10%. Steve Sosnick, chief strategist at Interactive Brokers, warned, “Allocating such a large portion to retail investors could mean that buying power is already exhausted at the IPO stage.”
A proposal to partially waive the 180-day mandatory holding (lockup) period has also surfaced, prompting criticism that the structure merely helps early investors and employees cash out at the expense of retail investors. Valor Equity Partners, led by Musk’s close friend Antonio Gracias, is SpaceX’s second-largest shareholder and stands to receive close to $20 billion under its investment agreement with the company.
Governance imbalance is another point of contention. Musk holds 85% of voting rights. As a result, SpaceX is registered as a “controlled company” under Nasdaq rules and is exempted from the requirement to fill the majority of its board with outside directors.
Even more serious is the forced buying structure. In March of this year, Nasdaq introduced a “fast-track entry” rule that allows large IPO companies to be included in the Nasdaq 100 index just 15 trading days after listing. That is unusual considering past cases such as Facebook (seven months) and Tesla (three years). As a result, exchange-traded funds (ETFs) and retirement accounts that track the index are required to buy the stock. Goldman Sachs has estimated that up to $60 billion in “forced buying” could flow in.
Denmark’s pension fund Akademiker Pension ultimately decided not to participate in the IPO, and the California Public Employees’ Retirement System (CalPERS) sent a letter expressing concerns. They point to SpaceX’s price-to-sales (P/S) ratio of 87 times, based on this year’s expected revenue of about $20 billion, more than double Nvidia’s ratio at its peak.
