Even before the IPO, why are so many people already holding shares in Elon Musk’s SpaceX?

SpaceX, Elon Musk’s aerospace and satellite company, is on the verge of one of the largest initial public offerings (IPOs) in history. After 24 years as a private company, SpaceX’s opening to the public is an event that the entire financial world has been eagerly awaiting.

However, a paradox is unfolding: despite not being listed on the stock exchange, the company’s shareholder list is already incredibly long, with names that no one would have expected.

The answer lies in a highly opaque secondary market, where shares of unlisted companies are traded through legal entities known as Special Purpose Vehicles (SPVs).

The insatiable thirst for SpaceX.

According to statistics from the New York Times (NYT) based on records from the U.S. Securities and Exchange Commission (SEC), more than 170 investment entities bearing the name “SpaceX” or “Space Exploration” have been established, mostly within the last six years. It’s worth noting that the actual number is likely much higher, as not all entities holding SpaceX shares use the company name in their legal documents.

As SpaceX aims to raise more than $50 billion in an IPO that could take place as early as June, the private market for the stock has been pushed into a state of “extreme acceleration.” Sim Desai, CEO of Hiive, a platform specializing in brokering private equity sales, commented that the current demand for SpaceX stock is “unmet.”

The surge in SpaceX-related SPVs not only demonstrates Elon Musk’s immense appeal but also serves as a “preview” of what’s to come for AI “unicorns” like OpenAI or Anthropic.

Shriram Bhashyam, Chief Operating Officer at Sydecar, commented that the growth story of US stocks is gradually shifting from the public market to the more closed private markets.

Over the past decade, retail investors have sought to access “giants” like Twitter or Uber through SPVs before they go public. The nature of an SPV is to allow a group of investors to pool capital into a single entity to make a joint investment.

For many, owning SpaceX shares before the IPO was not just an investment, but also a “status symbol” to show off. Typically, legal regulations restrict who can invest in private companies due to the high level of risk. Companies also have the right to approve who is allowed to be listed on the shareholder board. SPVs are a “backdoor” that allows those without direct connections to Silicon Valley elites to still get a foothold.

The list of people who “many managed to own” SpaceX shares is diverse. Rapper 2 Chainz shared in a podcast that he bought shares very early on through private investment connections. Anthony Scaramucci, former advisor to President Donald Trump, also confirmed owning shares through a private funding round.

In fact, more than 150 followers of the “Rich Habits” podcast have contributed capital to indirectly become shareholders of this rocket company.

Risk

However, this democratization of investment comes with significant risks. This market lacks transparency regarding financial data and the true origin of the shares being offered for sale.

SPVs can be set up in very complex ways: one SPV invests in another SPV, and so on through multiple layers. Each layer adds management fees and commissions, severely reducing the actual returns for retail investors.

This overlap has also raised national security concerns. US lawmakers such as Elizabeth Warren and Andy Kim have sent letters warning the Department of Defense about the possibility of foreign investors using SPVs and offshore accounts to purchase shares in SpaceX.

This poses a risk of leaking sensitive information from a company that holds many important US military contracts.

In fact, in 2021, SpaceX faced an awkward situation when Leo Group (a Chinese company) announced a $50 million investment in the company through SPVs owned by investor Iqbaljit Kahlon. SpaceX’s leadership immediately had to act to eliminate this investment in order to protect its position as a US government contractor.

Furthermore, excessive excitement often breeds scammers. When news of the IPO broke last December, offers to buy SpaceX shares flooded in with unrealistic valuations, sometimes reaching as high as $800 billion.

US authorities have previously dismantled numerous scams involving “underground” stocks. In 2023, the founder of Vika Ventures was sentenced to eight years in prison after defrauding investors of over $6 million by promising to help them buy SpaceX shares, but instead using the money to buy Corvettes and Patek Philippe watches.

Matt Grimm, co-founder of the private defense company Anduril, expressed skepticism about this trend: “How many investors in America are mistakenly believing they own a piece of SpaceX when in reality they’re just funding the lavish lifestyles of some Miami broker?”

The allure of SpaceX is real, but there’s a huge gap between the glamour of Elon Musk’s rocket launches and the harsh reality of the secondary market. For individual investors, the advice is always to exercise extreme caution before accepting offers of a “special investment opportunity” that is typically reserved for the ultra-wealthy.