Elon Musk, a pioneer in commercial space exploration andelectric cars, is now tinkering with one of Wall Street's moststoried products: the management led buyout.

Musk, in tweeting Tuesday that he may take Tesla Inc. private,said he hoped “all” investors would remain shareholders after thebuyout rather than follow the conventional approach of cashing out.He looked no further than his rocket company—Space ExplorationTechnologies Corp.—for a way to keep Tesla shareholdersonboard.

For years SpaceX has run an internal stock market for employeesand other shareholders, allowing it to remain closely held. Theycan privately sell shares to sophisticated investors such asFidelity Investments through liquidity events, according to aletter from Musk to employees. Tesla could use a similar structureto go private without requiring stockholders to cash out, saidSohail Prasad, founder of San Francisco-based Equidate, which helpsclosely held tech firms hold similar share sales.

In an email to Tesla employees on Tuesday, Musk said thestructure envisioned for Tesla is similar in many ways to theSpaceX structure: external shareholders and employee shareholdershave an opportunity to sell or buy approximately every sixmonths.

Institutions negotiate a set price for the stock with SpaceXbased on criteria such as the rocket company's financialperformance and market conditions, Prasad said.

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Incentive To Hold

Fidelity has disclosed in regulatory filings that some of itsmutual funds, including the Fidelity Growth Company Fund, acquiredSpaceX shares through private placements beginning in January 2015.A spokeswoman for Fidelity, which invests in shares of otherprivate companies including Uber Technologies Inc., Lyft Inc., andAirbnb Inc. through its mutual funds, declined to commentTuesday.

While Musk is offering to buy investors out at $420 a share, heis also encouraging them to hold onto their stock. Putting in placethe structure employed by SpaceX would provide investors with anavenue to sell their stock in the future should Tesla go private byremoving its shares from trading on the Nasdaq Stock Market, Prasadsaid.

In turn, an internal Tesla market could encourage smallerinvestors to hold onto their stock, lowering the amount of money,which could be tens of billions, that Musk must raise for thebuyout.

“If you are a believer in Elon, I would continue to hold ontothose shares,” said Michael Jurasic, a securities attorney at Ropes& Gray, who added that it's unclear exactly how Tesla's buyoutwould work. Once Tesla is private, Jurasic said, “I don't see anyway you could get back in as your typical retail investor.”

As a private company, Tesla would be able to sell newshares only to institutions and individuals who have annualincome of at least $200,000 or a minimum net worth of $1 million,not including their primary residence. But federal securities lawsdo allow smaller investors to retain stakes in public companiesthat decide to go private, said Erik Weingold, an attorney whospecializes in private placements. States also have provisions thatpermit existing investors in a private company to continue buyingits shares, even if they don't meet the income or net worththresholds, Weingold said.

Tesla has many mom-and-pop investors. Its shareholders ofrecord—the term for people who hold stock under their ownname—totaled 1,156 at the end of January, more than double the 511at General Motors Co., according to regulatory filings. And thatdoesn't include Tesla shareholders who hold their stock under thename of their bank or brokerage, a figure that is “substantiallygreater” than the one for shareholders of record, Tesla filingssay.

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Benefit to Tesla: No More Shorts

If Tesla follows a route similar to SpaceX, Musk would have moresay over the price of the electric-car maker's stock and greaterability to determine who its stockholders are. And because shareswould no longer be traded on an exchange, short sellers would beshut out.

“They can set the price and where the shares are going,” saidJustin Byers, chief data officer for the Prime Unicorn Index, whichtracks the performance of 102 private U.S. companies valued at $500million or more.

Musk's tweets about how Tesla could structure the deal has left$370 billion asset manager Janus Henderson Group Plc perplexed.

“I don't really understand the idea of what was suggested in thepotential for them to go private,” Dick Weil, Janus Henderson'schief executive, said Thursday in an interview with BloombergTelevision. “I, like a great many others, am confused by what ismotivating” the go-private plan and “why it was communicated in theway it was. I just can't interpret it. It doesn't make sense tome.”

Another route Musk could take would be to “go dark” byde-listing Tesla and reducing the number of shareholders below thethreshold that requires Securities & Exchange Commission (SEC)registration and reporting. Tesla could seek SEC approval to make atender offer solely to its small shareholders while retaininglarger institutional owners, John Coffee, a professor of law atColumbia University, said in an interview.

If Tesla goes private, there will be some shareholders whoaren't happy because of the loss of liquidity compared with that ofstock traded daily on a exchange like the Nasdaq Stock Market,Coffee said.

Once private, Tesla would have to continue filing publicfinancial reports with the SEC if it had more than 300shareholders. But for Musk, that may be a small price to pay inreturn for greater control over Tesla's stock.

“He may be okay if the world knows his profit and loss, as longas he doesn't have to deal with the short-sellers and the wildfluctuations in his stock,” said Jurasic.

From: Bloomberg

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