Who will pay the price when the SpaceX hype ebbs? History says it will be the little guy. <\/p>\n
In the second trading day as a public company, SpaceX\u2019s initial public offering still was being treated as an extraordinary event in Wall Street history: <\/p>\n
The largest IPO ever, creating the first trillionaire in Elon Musk, its boss, and bringing the company\u2019s market value to $2.28 trillion.<\/p>\n
On Monday, the stock gained 19.6% on top of its first-day gain of 19%, closing at $192.50. But the IPO is extraordinary in other ways that are becoming more clear as the pre-IPO frenzy yields to the company\u2019s post-IPO reality. <\/p>\n
The SpaceX IPO raises unprecedented questions about Wall Street\u2019s role in future mega-IPOs, what this event means for the current bull market in stocks, the wisdom of concentrating so much wealth in so few hands and the rise of wealth inequality. The answers to these questions may not be pretty.<\/p>\n
The fact that Wall Street designed a deal that needed $20 billion of retail money to get it across the line tells you something about who they wanted in the building.<\/p>\n
\u2014 Financial commentator Patrick Boyle<\/p>\n
Last week, I pointed to some issues connected to the SpaceX IPO<\/a>, including the utterly fantastical rationale for the company\u2019s outsized market valuation and the prospect that billions of dollars of shares may be shoved into the retirement accounts of investors who don\u2019t want them, thanks to the willingness of Nasdaq and other stock index sponsors to accept the shares into their indices well ahead of the customary \u201cseasoning\u201d delay. <\/p>\n But there\u2019s more to think about. Start with the paucity of control that shareholders will get for their investments. <\/p>\n Get the latest from Michael Hiltzik <\/p>\n Commentary on economics and more from a Pulitzer Prize winner.<\/p>\n By continuing, you agree to our Terms of Service<\/a>, which include arbitration and a class action waiver. You agree that we and our third-party vendors may collect and use your information, including through cookies, pixels and similar technologies, for the purposes set forth in our Privacy Policy<\/a> such as personalizing your experience and ads. <\/p>\n Law professor Ann Lipton, who monitors shareholder rights from the University of Colorado, reminds us of the traditional observation that \u201cshareholders have three powers with respect to the corporations in which they invest: to vote, to sell, and to sue<\/a>,\u201d enabling them to \u201cprotect their investment and discipline management.\u201d<\/p>\n Investors in SpaceX have none of those options. <\/p>\n The single votes that they acquire for every SpaceX Class A share offered in the IPO is swamped by the 10 votes per share of the company\u2019s class B stock. As I reported last week<\/a>, Musk will own a mere 12.3% of the Class A shares, but 93.6% of the Class B shares, which have 10 votes each. That gives him 85.1% of all shareholder votes. <\/p>\n As a result, the prospectus says, \u201cMr. Musk will be able to control the outcome of matters requiring shareholder approval,\u201d including the selection of directors and even whether he himself should step down.<\/p>\n Wall Street firms have enticed retail investors into buying into the IPO \u2014 Fidelity, for example, reduced the minimum account balance allowing clients to buy into an IPO from $100,000-$500,000 to $2,000. <\/p>\n But although those buyers can sell at any time, they will be punished for selling within the first 15 days after the IPO: The \u201cfirst flip,\u201d Fidelity warns, will result in their being blocked from future IPOs for six months; a second flip blocks them for a year and a third blocks them permanently. <\/p>\n On the other hand, insiders can sell a lot sooner than is customary. Typically, insiders of newly public companies have to wait at least six months before selling their shares, a period known as the lockup. <\/p>\n SpaceX insiders, however, can start selling their shares as soon as the second trading day after the company issues its second-quarter financial disclosure, expected around Aug. 11. (Musk and some other highly placed insiders have committed to holding their shares for at least 366 days.) <\/p>\n SpaceX reserved an unusually large tranche of its IPO for retail investors \u2014 20% or more of the $75 billion raised. \u201cThe fact that Wall Street designed a deal that needed $20 billion of retail money to get it across the line tells you something about who they wanted in the building,\u201d notes the former hedge fund operator and YouTube financial commentator Patrick Boyle<\/a>.<\/p>\n Why did the company and its underwriters do that? It\u2019s because, compared with institutions, retail investors are credulous, vulnerable to hype, and given to hanging on to a stock long after institutions have done the math on an underperforming investment and exited. <\/p>\n Shareholder lawsuits? Nope. The SpaceX bylaws require that any shareholder actions be brought not in court, but in arbitration \u2014 traditionally a management-favoring venue. <\/p>\n So no vote, no sales, no lawsuits. That might not matter as much if shareholders could count on the SpaceX board to protect their interests, but your old Magic 8 Ball<\/a>, if it\u2019s on the ball, might counsel: \u201cDon\u2019t count on it.\u201d <\/p>\n Of the six board members listed in the IPO prospectus (not counting Musk and Gwynne Shotwell, who basically runs SpaceX as its chief operating officer), four are old cronies of Musk\u2019s. They\u2019re Ira Ehrenpreis, a longtime director of Tesla, which Musk controls; Antonio Gracias, a director of Musk\u2019s private firms Neuralink and the Boring Co. and a former Tesla director; Steve Jurvetson, another former Tesla director; and Luke Nosek, a co-founder of PayPal, which was the original source of Musk\u2019s wealth.<\/p>\n The boards of Musk\u2019s companies have generally indulged his desires. Gracias and Jurvetson were on the board of SolarCity, which Musk merged into Tesla<\/a> when the former was looking financially impaired in 2016. Ehrenpreis was on the Tesla board when it gifted Musk with a $1-trillion pay package<\/a> last year.<\/p>\n That brings us to the question of whether it\u2019s healthy for society to have so much wealth concentrated in the hands of mega-plutocrats such as Jeff Bezos, Mark Zuckerberg and Musk. These are people who are not at all shy about wielding their wealth to get their way, devil take the hindmost. Herman Melville put his finger on the issue in Moby-Dick, through Father Mapple\u2019s sermon, in which he thunders, \u201cSin that pays its way can travel freely, and without a passport; whereas Virtue, if a pauper, is stopped at all frontiers.\u201d <\/p>\n Melville wrote that in 1851, but it echoes in Musk\u2019s DOGE service, where his henchpersons ran roughshod through federal programs, stripping them of personnel and funds in what turned out to be a vastly overstated claim of budgetary savings. The wreckage included the U.S. Agency for International Development, or USAID, which could have played an important role in addressing the ongoing Ebola virus outbreak, the cause of illness and death for hundreds of victims in Africa. <\/p>\n But DOGE helped the Trump administration reduce USAID to an empty shell<\/a>. \u201cAbout two weeks into the Trump administration, Musk tweeted that he just spent the weekend feeding USAID into the wood chipper,\u201d recalls former USAID health official Nicholas Enrich<\/a>, who was present at the destruction.<\/p>\n The siren song of Musk\u2019s wealth and the prospect that investors would buy in despite the fantastical claims being made for SpaceX\u2019s future allowed Musk to bully the biggest Wall Street investment banks into capitulating to his vision, and to his personal IPO design. (The IPO prospectus lists 32 banks as underwriters.) <\/p>\n In a normal IPO, the banks\u2019 role is to test the waters for an upcoming issue, determining the right opening price. In this case, Musk decreed an opening price of $135 per share and the banks went along. They also accepted what may be record-low fees for what turned out to be their order-taking role. <\/p>\n Traditional IPO fees run as high at 7% of the issue, though fees have been trending toward 1% on mega-deals. For SpaceX, the fee was 0.7%; that number is small but it still came to about $500 million, to be doled out by Goldman Sachs and Morgan Stanley, the lead banks.<\/p>\n This may be the right moment to consider that even the most high-flying investment crazes generally end in tears. AI is beginning to have that acrid smell. It\u2019s proper to note that the driver of SpaceX\u2019s valuation isn\u2019t its space launches or its Starlink orbital wifi satellites, but its commitment to AI. <\/p>\n (Part of what may be driving the SpaceX frenzy my be the gains collected by early investors in Tesla, which have lent Musk a visionary\u2019s halo. That said, however, Tesla wasn\u2019t added to the Standard & Poor\u2019s 500 index and therefore into large-cap index funds until 10 years after its 2010 IPO.)<\/p>\n That\u2019s what accounts for almost all of the $28.5 trillion \u201ctotal addressable market\u201d the company claims for its services, never mind that it\u2019s a distant also-ran in the AI business. Never mind that for SpaceX, AI does little but burn money, accounting for $12.7 billion of its $20.7 billion in capital expenditures last year while losing $6.36 billion on $3.2 billion in revenue.<\/p>\n