SpaceX IPO Creates Uncertainty for Private Investors Buying Through Brokers

As SpaceX prepares for a potential IPO at a $1.75 trillion valuation, many investors who bought shares through secondary markets are uncertain whether they actually own legitimate stakes in the company. The complex network of brokers and special-purpose vehicles has created opportunities for fraud and confusion about ownership.

Former Google executive Tejpaul Bhatia believes he owns part of Elon Musk’s SpaceX, though he admits he cannot be completely certain.

When Bhatia entered the aerospace sector in 2021, SpaceX had already become one of the globe’s most coveted private enterprises, worth approximately $75 billion, with ownership concentrated among original investors and entities connected to Musk. Unable to purchase stock directly, Bhatia accessed the secondary marketplace where an informal network of dealers trade shares of private corporations.

With SpaceX potentially heading toward a public offering this year at nearly $1.75 trillion in value, Bhatia might possess a profitable investment, though his shares came through intermediaries that complicate ownership verification.

“I hope I didn’t get duped,” stated Bhatia, who previously served as Axiom Space’s chief executive. “I don’t think I did, but again, there’s no way to know.”

Bhatia chose not to disclose his investment amount or identify his broker.

The potential returns from holding SpaceX stock before its market debut are substantial enough that many investors willingly pay extra for access while accepting the uncertainty. “It’s the hottest IPO opportunity in history,” Bhatia commented.

Bhatia represents part of an expanding group of investors who have invested in SpaceX through the unclear private company share market. These transactions frequently depend on special-purpose vehicles, or SPVs, which don’t directly hold company shares but instead combine investor funds to secure rights for future share purchases.

“You are relying on the counterparties in these transactions and their reputations,” explained Mitchell Littman, a New York attorney who counsels SPV managers and secondary market participants. He noted, “Every time there is hype around these type of things, inevitably the fraudsters come out of the woodwork because they smell an opportunity.”

The overwhelming interest in SpaceX shares has caused investors to accept remarkably complicated structures, based on interviews with 10 investors, industry specialists and analysts conducted by Reuters.

SpaceX, the Securities and Exchange Commission and the Department of Justice did not provide responses to requests for comment.

The emergence of SpaceX and other popular private enterprises like OpenAI has transformed the initial public offering environment. Currently, many of the world’s most valuable businesses remain private for extended periods, developing brand awareness and generating intense investor interest, unlike previous eras when rapidly expanding technology companies went public relatively quickly.

This shift has driven investors anxious about missing opportunities into secondary markets, where shares trade before IPOs. As interest has increased, so has the utilization of complex investment structures. Shares may move through up to five intermediaries, each adding their own fees and obscuring ultimate ownership, according to two brokers.

“It’s getting a little loosey-goosey,” said Namek Zu’bi, who oversees a fund managing over $500 million in assets. He rejected requests from his own investors to participate in SpaceX transactions due to 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 numerous SPV arrangements, investors only see the entity immediately above them, not whether actual shares exist at the top level. “That’s not enough to be certain the shares exist,” said one senior executive in the secondary market industry.

Additional layering increases costs, effectively reducing potential profit margins and benefits for IPO investors.

“The bigger dangers are overpaying and then multiple layers of fees,” said Jay Ritter, a University of Florida professor emeritus who studies IPOs, adding that beginning from an already elevated valuation provides limited growth potential for investors, with historical data showing that companies at high revenue multiples have typically underperformed the market.

As SpaceX’s worth increases, some investors worry that many could possess nothing more than documents when it becomes public.

Recently, SPVs have faced increased examination following several prominent pre-IPO fraud incidents. In December, financier Giovanni Pennetta was taken into custody at New York’s JFK airport on allegations that he created a fraudulent investment vehicle to sell non-existent shares in defense technology firm Anduril. Pennetta admitted guilt to wire fraud charges earlier this month.

In 2023, a financier received an eight-year prison sentence after deceiving over 50 investors who provided him nearly $6 million to purchase pre-IPO shares in various companies, including SpaceX.

The Department of Justice has not publicly disclosed a pre-IPO fraud case involving SpaceX since that time. However, investors and industry leaders said the company’s appeal has increased the dangers.

Last month, Peter Wright, who occasionally serves as an intermediary between investors and brokers, got a text from another broker representing an Emirati sheikh seeking a significant SpaceX position.

“We have a family office interested in buying about $1.2 billion of SpaceX stock immediately, and are looking for a seller,” stated the message, which Reuters reviewed.

However, even such a large offer did not lead to a completed transaction. Wright and the sheikh’s broker informed Reuters that the client could not purchase shares directly, and the deal fell through.

Wright said his company refuses transactions involving more than one intermediary, citing difficulties in verifying ownership. “At that point, diligence is impossible,” he stated.

Zu’bi said interest often stems from fear of missing out rather than company fundamentals.

“They want to say to their yacht friend, ‘Hey, I’m in SpaceX. Are you in SpaceX too?'” he explained.