The Space Exploration Technologies Corp’s (NASDAQ:SPCX) historic IPO that resulted in the company raising close to $86 billion has sparked considerable buzz, but also concerns from various experts.
In conversation with Natalia Renta, the Associate Director of Corporate Governance and Power at Americans For Financial Reform, Benzinga asked her what she thought of the Elon Musk-led company’s blockbuster public debut and this is what she had to say.
SpaceX IPO Is The Perfect Illustration Of Pro-Insider Policies
Renta expressed that she was “very concerned” about the SpaceX IPO, which was the perfect representation of a trend in the financial markets of being increasingly in favor of “corporate insiders” and against the interests of “regular shareholders.”
She outlined issues with SpaceX’s governance structure, citing concerns with Musk being the CEO, Chair and CTO of the company. Musk also holds over 85% of voting rights in the company, as well as a vast amount of Class B shares under the commercial space flight giant’s dual-class share structure.
SpaceX has a “sky-high valuation,” Renta said, adding that the registration statement, according to critics, read like a “sci-fi novel,” with “unrealistic” expectations like orbital data centers.
Index Providers’ Role In Protecting Retirement Savings
With SpaceX gaining entry into the Nasdaq 100 and other such indices, index funds that track the indices would be investing in the company. The funds comprise retirement savings like 401(k)s and more.
Renta said that she was worried about the company’s fast-tracked entries into indices like the Nasdaq 100. “We’re concerned that SpaceX is getting crammed into these index funds while the share price is very volatile and very inflated,” she said, which poses a threat to many retirement savings funds like 401(k) accounts.
However, Renta also acknowledged that the index providers remain largely unregulated and that it needed to change. She added that asset managers have a fiduciary duty and have to protect investors by determining whether to track SpaceX or not.
“You can’t just blindly follow a largely unregulated index provider; you need to make your own determination so that they can fully protect their ultimate beneficiaries,” she outlined.
Renta also mentioned that the S&P 500’s move not to amend its rules was the right decision to protect the investors. “I think they [other indices] should take S&P’s lead,” she said, adding that the rules like minimum float requirements and longer seasoning periods were put in place to “be protective of index investors.”
SpaceX’s Dual-Class Share Structure
Renta lamented the dual-class share structure, saying that the market should “resist its normalization.” She said that the structure helps elevate the “erosion” of shareholder rights that allow them to have a say in corporate governance. She termed the structure “problematic.”
“We need to take steps to protect regular investors and actually have a financial system that works for not just a few insiders, but for all of us,” she said. Renta expressed concerns with Musk’s voting power.
When asked if shareholders in SpaceX had any recourse against the management or if they could do anything, Renta said that shareholders could do “very little, like very, very little.”
The Law
“They’re instituting a 3% ownership threshold for anyone to bring shareholder derivative claims, which are claims that regular shareholders can bring on behalf of the company against insiders for wrongdoing,” Renta said, when speaking about possible legal recourse for shareholders.
Texas corporate law, where SpaceX is incorporated, allows the Board of an organization to require plaintiffs to hold at least 3% of the company’s shares, which in the SpaceX context could amount to billions of dollars, Renta said.
With MegaCap companies like SpaceX, Renta said that the “federal government could step in and set a corporate governance floor to guarantee rights for regular shareholders” by enforcing listing standards or requiring companies over a certain size to have a “federal charter.”
She also said that asset managers like BlackRock Inc. (NYSE:BLK) have been under pressure to “side with the management” over the past few years, adding that it needed to change.
SpaceX Is Volatile, Hold Off
“Recently-public companies can be very volatile,” Renta said. “This is exactly why you need protections from the index providers and for companies not to be jammed into indices,” she added.
Renta said that its [SpaceX] volatile nature was the perfect illustration of why index providers should “not fast-track SpaceX” and instead give the market an adequate amount of time “to actually assess what the share price should be based on the company’s actual fundamentals,” she said.
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