SpaceX IPO leaves some private share buyers unsure what they own

Synopsis

Entrepreneur Tejpaul Bhatia is confident he owns a slice of Elon Musk's SpaceX. But he can't be 100% sure. When the former Google executive entered the space industry in 2021, SpaceX ​was already one of the world's most sought‑after private companies, valued at about $75 ​billion, with shares largely locked up by early backers and institutions close to Musk.

Entrepreneur Tejpaul Bhatia is confident he owns a slice of Elon Musk's SpaceX. But he can't be 100% sure.

When the former Google executive entered the space industry in 2021, SpaceX was already one of the world's most sought‑after private companies, valued at about $75 billion, with shares largely locked up by early backers and institutions close to Musk. Bhatia couldn't buy shares directly, so he turned to the secondary market where a loose network of brokers buy and sell the shares of privately owned companies.

Now, with SpaceX preparing for a stock market debut this year at a valuation near $1.75 trillion, Bhatia could be sitting on a lucrative investment, but his shares were bought through brokers that make ownership hard to verify.

"I hope I didn't get duped," said Bhatia, the former chief executive of space company Axiom Space. "I don't think I did, but again, there's no way to know."

He declined to share the value of his investment, or the ‌broker's name.

The potential payoff from ⁠owning SpaceX shares ⁠before it goes public is big enough that many are willing to pay a premium for access and live with the uncertainty. "It's the hottest IPO opportunity in history," he said.

Bhatia is among a growing swell of investors who have poured money into SpaceX through the opaque market ​for private company shares. These deals often rely on special-purpose vehicles, or SPVs, which don't own shares in the company. They pool investor money to buy the rights to purchase the shares at a later time.

"You are relying on the ​counterparties in these transactions and their reputations," said Mitchell Littman, a New York-based attorney who advises SPV managers and secondary market investors. He added, "Every time there is hype around these type of things, inevitably the fraudsters come out of the woodwork because they smell an opportunity."

The intense demand for SpaceX shares has led investors to accept unusually complex arrangements, according to 10 investors, industry experts and analysts interviewed by Reuters.

SpaceX, the Securities and Exchange Commission and the Department of Justice didn't respond to comment requests.

Huge appetite for private tech giants

The rise of SpaceX and other hot private companies like ⁠OpenAI has ‌reshaped the initial public offering landscape. Today many of the world's most valuable firms are staying private for years - building brand recognition and creating intense demand from investors - unlike in ​years past when fast-growing tech companies ​went public relatively quickly.

That has pushed investors eager not to miss out into secondary markets, where shares change hands before an IPO. As demand has surged, so has ⁠the use of layered investment vehicles. Shares can pass through as many as five intermediaries, each with its own layer of ​fees, obscuring who ultimately owns what, according to two brokers.

"It's getting a little loosey-goosey," said Namek Zu'bi, who manages a fund with more than $500 ​million in assets. He said he turned down requests from his own investors to buy into SpaceX deals because of fraud concerns.

"A lot of people are going to make a lot of money," Zu'bi said. "But you're also going to get a lot of people who are surprised or shocked" that they don't own any shares.

In many SPV deals, investors can see only the entity directly above them, not whether the shares at the top actually exist. "That's not enough to be certain the shares exist," said one senior executive in the secondary market industry.

Increased layering adds costs, which effectively compresses the potential profit margins and upside for investors in the IPO.

"The bigger dangers are overpaying and then multiple layers of fees," said Jay Ritter, a University of Florida professor emeritus who researches IPOs, adding that starting from an already high valuation leaves limited upside for investors, with history showing that companies at elevated ‌revenue multiples - even the biggest - have tended to lag the market.

Fraud fears grow

As SpaceX's valuation climbs, some investors fear that many could be holding little more than paperwork when it goes public.

In recent years, SPVs have drawn closer scrutiny after a string of high‑profile pre‑IPO fraud cases. In December, financier Giovanni Pennetta was arrested at New York's JFK airport on ​charges alleging he set up a ​fake investment vehicle to sell nonexistent shares in defense technology ⁠company Anduril. Pennetta pleaded guilty earlier this month to wire fraud charges.

In 2023, a financier was sentenced to eight years in prison after defrauding more than 50 investors who gave him almost $6 million to buy pre-IPO shares in multiple companies, including SpaceX.

The Department of Justice has not publicly announced a pre-IPO fraud case involving SpaceX since then. But investors and industry executives said the company's popularity has heightened the risks.

Fear of missing out fuels risk-taking

Last month, Peter Wright, who sometimes acts as a middleman between investors and brokers, received a text message from another broker acting for an Emirati sheikh who wanted to take a large stake in SpaceX.

"We have a family office interested in buying about $1.2 billion of SpaceX stock immediately, and are looking for a seller," said the message, which was seen by Reuters.

Yet even an offer of that size did not open the door to a deal. Wright and the sheikh's broker told Reuters the client couldn't buy shares directly; the transaction didn't close.

Wright said his firm refuses to work with deals that sit behind more than one intermediary, citing the difficulty of checking ownership. "At that point, diligence is impossible," he said.

Zu'bi said demand is often driven by fear of missing out rather than fundamentals.

"They want to say to their yacht friend, 'Hey, I'm in SpaceX. Are you in SpaceX too?'" he said.

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