Going private is not as easy as it looks, especially if you go down a path proposed by the mercurial Elon Musk, founder and largest shareholder of Tesla Inc. TSLA, +0.86% .
Musk’s tweet on Tuesday proposed returning Tesla, the electronic car company, to private ownership to give shareholders, especially his employee shareholders, a chance to avoid stock price volatility that “can be a major distraction” and allow the company maintain its focus on long-term goals. Also, as the “most shorted stock in the history of the stock market,” Musk believes many people have an incentive to “attack” the company, attacks Musk has responded to in a way critics and short-sellers say is not appropriate for a public company CEO.
He told Tesla employees in an email shortly afterward, “I would like to structure this so that all shareholders have a choice. Either they can stay investors in a private Tesla or they can be bought out at $420 per share, which is a 20% premium over the stock price following our Q2 earnings call (which had already increased by 16%). My hope is for all shareholders to remain, but if they prefer to be bought out, then this would enable that to happen at a nice premium.”
In a follow-on tweet, he explained that his “hope” is that all current investors would remain Tesla shareholders even if its private would be accomplished by creating a “special purpose fund” as he said he and executives of his other private company private do with ”Fidelity’s investment in SpaceX.”
Back in January of 2013, Musk responded to a growing push by SpaceX employees for that company to go public by saying that Tesla, and its subsidiary SolarCity, had IPOd “because they didn’t have any choice. Their private capital structure was becoming unwieldy and they needed to raise a lot of equity capital.”
Musk is now using the same reasons for Tesla going private as he cited to the SpaceX employees.
A deal to go private again would be structured like SpaceX, he told employees in an email. All Tesla employees would remain shareholders, just like at SpaceX, and external and employee shareholders would have an opportunity to sell or buy shares approximately every six months.
“Some at SpaceX who have not been through a public company experience may think that being public is desirable,” Musk wrote in 2013. “This is not so. Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.”
John Coates, a professor of law and economics at Harvard Law School, told MarketWatch in an email, “I know of no legal way to offer public shareholders of a listed company an equity security while also going private. I also know of no legal way to offer $X billion worth securities of any kind to more than 35 unaccredited investors without registering with the SEC.”
There are now some opportunities for smaller offerings of securities, $5 million or less in any 12-month period, but those are restricted to 35 retail investors or less.
Securities laws require companies to go public via a traditional full initial public offering registered with the SEC if they have more than $10 million in total assets and a class of equity securities, like common stock, that is held of record by either 2,000 or more persons or 500 or more persons who are not accredited investors.
These requirements are intended partly to avoid an unequal distribution of information between potential retail investors and large accredited investors when a company is private and no public disclosure is required.
Tesla has 169.8 million shares outstanding but only 126.9 million in public float, that is, shares that are actually available for trading. Approximately 25.3 % of its shares are held by insiders, including Elon Musk who holds 37.9 million shares or 21.9% of the outstanding shares as of the date of the company’s last proxy filing with the Securities and Exchange Commission.
As of Dec. 31, Tesla, Inc. had 37,543 full-time employees, most who hold Tesla shares.
Public company status and listing on an exchange also avoids the complicated private accounting for shareholder interests that develops when companies have thousands of investors of very different sizes and financial sophistication. Musk may be thinking of the structure used by traditional venture capital funds for angel investors to primarily invest in early stage investments, set up as a pooled investment vehicle in a limited partnership or limited liability company, an LP or LLC. This structure enables a group of investors, usually individuals, to invest collectively.
“The closest I could imagine to what seems to be Musk’s idea is to create a new hedge or private equity fund, limited to accredited investors, offering limited partner interests in exchange for Tesla stock,” said Coates, “and, then, for a combination of large direct investors to buy stock from Tesla and then in some fashion cash out the remaining public investors.”
“A mutual fund could possibly also invest in the ongoing company, which would allow unaccredited investors an ability to invest indirectly in it,” Coates added. “But the fund would have to live with diversification requirements that would make it not only an indirect but also a diluted form of Tesla ownership.”