Can Elon Musk’s SpaceX Raise More Equity Capital Without Going Public?

Elon Musk’s SpaceX, a pioneering company in reusable rockets and spacecraft design, continues to rank as one of the most valuable private companies in the world. According to Bloomberg, its valuation nears 180 billion dollars, over 100 times that of a “unicorn”— a private company that is valued at over one billion dollars. To date, its Starlink division has launched about 5,000 satellites, serving more than 1.5 million subscribers in over 50 countries across the globe. A natural question that arises is: Will SpaceX choose to go public, and if so, when, to raise its needed capital to complete its grand mission by bolstering the Starship, Starlink, and other initiatives? In 2022, Elon Musk said to his employees that “being public is definitely an invitation to pain.” If he continues to be skeptical about taking his company public due to reasons such as short-term earnings pressure and market fluctuations, what is his alternative? 

SpaceX is one of many companies that remain private, leading both regulators and researchers to express concern over the shrinking number of publicly traded companies in the United States. The large increase in the number of unicorns is often attributed to private companies having easy access to investors who are interested in private markets as “the new public markets.” 

What Makes Unicorns’ Growth Sustainable Without Going Public? 

Since the enactment of the Securities Act of 1933, issuers have been prohibited from offering securities without registration at the Securities and Exchange Commission (SEC). Is there any exemption from the securities registration? Yes, Regulation D is one such exemption. Specifically, Regulation D allows private companies to raise equity from accredited investors without securities registration, serving as the major vehicle through which these companies fund their operations. In the wake of deregulation, Regulation D and other related regulations have been amended several times to strengthen the accessibility of the exemption to private companies. These amendments include, among others, an alteration of the Investment Company Act in 1996. This alteration lifted the cap of 100 investors in private investment funds (spurring the emergence of mega-scale private equity funds). The introduction of qualified institutional buyers (QIBs) to Rule 144A in 1999 facilitated secondary sales of shares originally issued under Section 4(a)(2) or Regulation D. Subsequent changes include: the JOBS Act in 2012, lowering the threshold to trigger such requirements as securities registration and associated financial disclosures under the Securities Act of 1933 and the Securities and Exchange Act of 1934 (through the increase of the shareholder cutoff from 500 to 2,000) and the legislation of Rule 506(c) of Regulation D in 2013 following the JOBS Act, enabling private companies to raise up to 50 million dollars through general solicitation. In 2020, the SEC expanded the criteria for becoming accredited investors to those who are deemed capable of bearing investment risk from purchasing equity issued by private companies, increasing the investor base of equity sales based on Regulation D. Notably, the income threshold for accredited investors has not been adjusted for inflation, prompting Professor Elisabeth Fontenay to describe Regulation D as the Act’s exemption that “swallows” the securities registration requirements.   

What Do We Find?  

What is the most obvious consequence of “more accessible” Regulation D? Perhaps, private companies are increasingly raising the required equity capital through Regulation D offerings rather than going public. Our first research objective is to document this trend in data. We retrieved all Form D filings available in the SEC’s EDGAR platform over the period from 2010 (when Form D filing data became machine-readable) to 2019 (immediately before the amended definition of accredited investors in 2020). Private companies sold a total of 1.3 trillion dollars of equity through Regulation D, in contrast to a total of 0.3 trillion dollars of equity raised from the initial public offerings (IPOs). In terms of frequency, private companies accessed the Regulation D equity markets 106,176 times with a median of 1.4 million dollars in proceeds (after inflation adjustment). During the same period, private companies accessed the IPO markets 368 times with a median of 103.3 million dollars in proceeds (after inflation adjustment). These statistics do not necessarily indicate that the capital market for unregistered securities through Regulation D exclusively caters to small businesses. The top 1%, or 1,061 Regulation D equity offerings raised more than 164.1 million dollars (after inflation adjustment), which is even larger than the median IPO proceeds. To illustrate, these top 1% Regulation D equity offerings include 2.8 billion dollars raised by Uber Technologies Inc. in May 2015 (before its IPO in 2019) and 1.8 billion dollars raised by Snap Inc. in May 2016 (before its IPO in 2017). 

Our second research objective is to examine whether public information about industry peers, such as their share price and financial disclosures, facilitates capital financing of private companies through Regulation D equity offerings. The intuition that investors of one company are able to obtain a useful valuation multiple for comparable firm analysis from price and accounting data of another company operating in the same product market sector is not new. In fact, the usefulness of comparable analysis among industry peers has been widely endorsed by regulators, practitioners, and educators. We take one step further and hypothesize that the increased availability of publicly traded peer information mitigates valuation uncertainty in equity raisings by private companies via Regulation D. Consequently, private companies, like Musk’s SpaceX, can raise more equity when more information on public peers adds confidence and transparency in the valuation of private equity markets.  

The remaining question is how to capture an increase in the number of public industry peers for reasons unrelated to capital funding of private companies. We accomplish this by designing our event test around 89 corporate spinoffs of public conglomerates, as these actions cause an increase in the number of publicly traded entities that are mandated to comply with the SEC’s disclosure requirements. Next, we compare the Regulation D equity raisings of private companies before and after the public peer’s spinoff event in a multivariate regression setting. Our estimates indicate that private companies raised more equity capital following the spinoff of their public industry peers, but the impact is statistically insignificant, on average. To more cleanly measure the impact of the increased availability of public peer information, we additionally identify whether a parent company did previously disclose segment financial information on its subsidiary before the separation of its business units. Our estimates from this cross-sectional test indicate that the impact of the increased quantity of public peer information is economically meaningful and statistically significant only when the parent company did not previously disclose the subsidiary’s segment financial disclosures. In terms of economic significance, when the spun-off subsidiary’s financial details were not publicly available during the period leading up to the spinoff event, our coefficient estimates translate into a 20%-increase in the aggregated Regulation D equity sales by private industry peers over the four-quarter period following the spinoff’s completion (relative to the four-quarter period before the initial filing of Form 10-12B). These test results suggest that more information about public peers caused by a spun-off subsidiary’s stock listing and disclosure compliance matters to private company investors when the additional comparable firm information is new to the investment community.    

Our results have several implications for the policy debate regarding how to design optimal regulations for private companies, in turn, fostering a robust and sustainable development of the economy. The deregulation efforts over the last few decades have been directed towards making the Regulation D equity raisings more accessible to private companies, obviating a need to rely on the IPO market to raise required equity capital. The shift in the regulatory emphasis can help small businesses raise needed equity capital without bearing the cost of going public. However, others express concern over more accessible Regulation D equity offerings decreasing the number of public companies and, as a result, hampering the overall quality of information environments. Relatedly, former SEC Commissioner, Allison Lee, pointed out the value of discussing stricter disclosure requirements for large-scale private companies, given their strong presence in socio-economic contexts. As long as an additional valuation multiple of a public company reduces the valuation uncertainty of its private counterpart in the same product space, the shrinking number of publicly traded companies as a whole may limit private companies’ ability to raise required equity capital via Regulation D.  

We acknowledge that our results do not directly speak to the validity of the regulatory regime shift; however, we believe we inform the broader debate by advancing empirical evidence that privately held companies “free ride” on mandatory disclosures of publicly traded industry peers. To the extent that private companies benefit from the externalities of public industry peers’ share price information and mandatory disclosures, it could be the case that more and more private companies choose to remain private for longer. This “corner solution” case indicates that there will be only a few public companies newly listed in stock exchanges, ultimately impairing the efficacy of the policy regime shift towards promoting small business capital formation.  

Sangwan Kim is an Associate Professor of Accounting at University of Massachusetts Boston.  

Jangwon Suh is an Assistant Professor of Accounting at Queens College–City University of New York.  

Category: Regulation D, private companies, equity offerings, information spillover.  

This post was adapted from their paper, “The Information Spillover Role of Corporate Spinoffs in Financing Activities: Evidence from Equity Sales by Private Firms through Regulation D,” available on SSRN.