How SpaceX found itself in the crosshairs of an SEC lawsuit

Emre Kelly James Dean
Florida Today
SpaceX CEO Elon Musk speaks at Kennedy Space Center in February.

When the Securities and Exchange Commission set its sights on Elon Musk and electric car phenomenon Tesla recently, the billionaire industrialist's rocket company, SpaceX, also got caught in the regulator's crosshairs.

Fallout from the clash with the SEC over Musk's controversial tweets about having raised money to take Tesla private turns out to have endangered many of the Silicon Valley darling's ventures because of a little-known process that connected all his companies – private and public – and put them at risk of being unable to pursue a specific form of fundraising. Musk, according to reports, grew concerned.

In the end, Musk settled with regulators and both sides agreed to waive fundraising limitations, but that SpaceX could have found itself in such a position shows just how deeply Musk's personality and presence are tied to his companies. 

It's not just everyday investors that could have been impacted – NASA, the Air Force and dozens of commercial companies have poured billions into SpaceX for its attractive launch system and, in the future, ability to take humans to the International Space Station from U.S. soil.

The lawsuit

Tesla and SpaceX CEO Elon Musk seen in July 2018.

Last week Musk, then chairman and CEO of Tesla, surprised regulators and experts when he turned down a settlement offer from the agency tasked with enforcing federal securities laws. It would have brought closure to the investigation into statements by Musk, made on Twitter, that there was “funding secured” to take Tesla private at $420 a share.

The SEC sued.

Forty-eight hours later, there was a new deal: Musk would step down as chairman for three years instead of two, but could remain CEO; the fine doubled from $20 million to $40 million, to be split between Tesla and Musk; Tesla would appoint two new directors to its board; and, finally, the company would have to establish a committee “to oversee Musk’s communications.” 

Despite the more severe terms, Musk and his legal teams agreed.

The misconception that SEC actions can’t impact private organizations is a common one, according to University of Virginia Professor Andrew Vollmer, who teaches securities law. SpaceX might be a private company, but it still doles out stock to employees and investors alike, though under different rules compared to public companies.

Because Tesla, Musk and his statements were central figures of the SEC lawsuit, Vollmer said, Musk's private ventures became subject to limitations in the securities laws.

“SpaceX and other companies where Musk is either a significant shareholder or officer have a serious risk that they can no longer raise money using the private offering exemption,” Vollmer said, noting that the “private offering” is just one way of several for private companies to raise funds. “But the commission has the power to grant exemptions from these disqualifications.”

And that power was exercised: Tesla confirmed to FLORIDA TODAY this week that those exemptions were granted in the settlement when the SEC approved waivers to enable fundraising for Tesla, SpaceX, The Boring Company and Neuralink. All those Musk-led enterprises, Tesla said, are in the same financial position they were prior to the investigation and lawsuit.

Tesla's share price reflected the timeline, diving from $307 to $265 when Musk declined the initial settlement. After the Saturday settlement and market opening on Monday, it had buoyed back to $310.

“There’s no doubt that he should have accepted the initial offering,” Vollmer said. “The settlement got worse for him in material, significant ways.”

The stability of SpaceX

At 3:45 p.m. Tuesday, Feb. 6, SpaceX's Falcon Heavy rocket blasted off for the first time from pad 39A at NASA's Kennedy Space Center.

Musk and his personality loom as a question mark over SpaceX.

Considered the company’s “lead designer,” Musk typically responds to Tesla customers on Twitter, posts updates about SpaceX initiatives, expresses his frustrations with the media and leads the occasional charge against Tesla short sellers.

But even with the settlement in the rearview mirror, he’s taken aim at yet another organization: the SEC.

“Just want to (say) that the Shortseller Enrichment Commission is doing incredible work,” he tweeted Thursday, asserting his frustrations with the practice of borrowing shares with the intention of profiting on an anticipated price decline. “And the name change is so on point!”

Musk’s ability to tweet statements like that, though, might soon change: The independent committee that will eventually oversee his communications isn’t expected begin that process for 90 days from the date of the settlement, according to Ars Technica.

But despite his tweets this week and the SEC run-in, experts agree that SpaceX – unlike Tesla, where Musk is more involved in day-to-day operations – is in stable hands.

“It’s a disruptive element within its own industry and, from all the evidence I’ve seen, is a stable and well-run organization,” said Dale Ketcham, chief of strategic alliances for Space Florida, the state's aerospace development agency. “It’s not been his finest hour, but SpaceX is meeting its milestones and has a very firm hand on the tiller with Gwynne Shotwell.”

Shotwell, president and chief operating officer at SpaceX, has been critical to the company – and Musk – since its establishment in 2002. She is seen as the stable figure, experts say, and is responsible for day-to-day operations, as well as outside representation at many conferences and events.

Under her and Musk’s leadership, the company has pushed forward to earn billions in NASA, Air Force and commercial launch contracts, making Falcon 9 the most frequently launched and cheapest-to-operate medium-lift rocket in the U.S. arsenal. It’s a cross-country effort that includes multiple launch pads on the East and West coasts, employing thousands along the way.

“I would imagine that Air Force leadership is cognizant of Elon’s situation, but I doubt that it would in any way threaten their commitment to SpaceX as a core supplier of launch services,” said space industry analyst Chris Quilty, president of Quilty Analytics in St. Petersburg. “I think the same holds true for NASA.”

Shotwell, Quilty said, “runs the company" and neither her nor Musk are immediately concerned with taking it public.

Musk’s current involvement with Tesla is serious, but experts in the past have said the 47-year-old South Africa-born magnate wakes up in the morning and sees SpaceX in the mirror. His long-term goals include massive spacecraft, named Big Falcon Rocket and Big Falcon Spaceship, designed to ferry humans to far-flung reaches of the solar system and the establishment of self-sustaining civilizations beyond Earth’s fragile atmosphere.

Those visions are a significant driver of his success, but SpaceX’s ability to pull off consistent launches and futuristic first stage landings have doubly captured the imaginations of his supporters. Next year, SpaceX plans to be the first commercial company to launch astronauts from U.S. soil to the International Space Station since the space shuttle program ended seven years ago.

Perhaps the SEC’s scrutiny of Musk will lead to more consistent behavior, according to University of Richmond Business Law Professor Carl Tobias, limited though enforcement might be.

“I think people are dubious that he can be reined in very much,” Tobias said. “It’s a little hard to work on both coastlines and run two major operations.”

Contact Emre Kelly at aekelly@floridatoday.com or 321-242-3715. Follow him on TwitterFacebook and Instagram at @EmreKelly.

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