"Going Private = Forced Liquidation" for many Investors

[eepic]

TL;DR If Tesla goes private, it may inadvertently force a lot of long term shareholders to sell some/all of their position.


I've been a believer in Elon and Tesla's mission for over five years now. I can comfortably claim that I am a true long term investor, having slowly (and painfully) accumulated a long position over the years without ever selling a share. Over the years I've spent thousands of hours researching and obsessing over every detail, and truly believe the upside is far beyond $420 in the longer term. Through the thick and thin, ups and downs, it's been tough but I've stayed disciplined and only ever timed the markets to decide entry points for new savings I want to deploy. I've spent the evening brainstorming how this conversion to a private company will affect my holdings as a Canadian and it's not looking good.


Possible Investor showstoppers to staying invested:
- Are only "accredited investors" eligible for the private investment vehicle? This would require a net worth (excluding residence) of $1 million or $200k income.
- Does your brokerage support the private investment vehicle or will they have trouble settling/clearing the conversion? This could be a concern for those with workplace restrictions on investments/brokers.
- Anyone who is using any margin for leverage will likely be forced to liquidate some of the position. However, given the nature of risks with margin accounts I don't think it's too unfair.


Canadian (and other International) Investors:
- Are Canadian and other international investors eligible to convert to the private at all?
- Can your brokerage support/clear/hold a US private investment vehicle?

Assuming those concerns are not an issue, there's still the problem of registered (tax-sheltered) accounts. I have TSLA in my "normal" non-registered brokerage accounts, my Registered Retirement Savings Plan (RRSP) account, and my Tax Free Savings Account (TFSA). The private investment vehicle will almost certainly NOT be eligible for the RRSP or TFSA in Canada (Designated Stock Exchanges). I understand programs like the Roth IRA are similar in nature to these Canadian accounts so there may be similar implications for Americans, but I don't know anywhere near enough to comment.

"RRSP" Account (Tax Deferral Account: Contribute pre-tax income, withdrawals count as taxable income when you take it out at retirement)
- Forced to liquidate at $420, this cash is tied up in the account.
- Moving shares or cash outside this account would trigger severe tax consequences, a 10-30% immediate withholding tax + income tax at your marginal rate. For non-retired working class in Ontario that's a net 30-83% tax hit which makes this an unrealistic option.

"TFSA" Accounts (Tax Shelter Account: Contribute post-tax income, gains inside are not taxed)
- Could withdraw outside the account and hold the private without the tax benefits on subsequent gains, which could be significant disadvantage in the long run.


Summary
In short, at best I will be able to hold private shares in some accounts but for tax-sheltered accounts I will likely be forced to liquidate (or take an unpalatable 30-83% penalty pulling shares/cash out to stay invested in the private shares). A really depressing day for me with this announcement, after years of planning and accumulating I don't want to be forced out of a large chunk of my Tesla investment at a paltry $420.

 

[angstrom]

I will admit it leaves a bad taste in my mouth at the thought of investing further. This has poor tax implications which place me in a predicament to be liquidating anything prior to Jan 1, 2019. All I've ever bought were the stock and deep in the money calls. So the $420 buyout is not so much the issue as the timing of it. That said, much of the insane volatility comes from a lack of clear financials which has only become worse with the SolarCity acquisition and not reducing the opaqueness that came with it.

Now that said, I know the upside is considerably higher than $420. If the company is visibly profitable there's no reason to hide it. I've been invested since 2012 with everything being LTCGs. Where this hurts is that in addition to stock I'm holding leaps that would be better exercised after a year than before.

 

[neroden]

The poll should have a "not sure yet" option. I'm waiting to see the details on how the conversion would actually work. For each type of tax favored account.

It is possible -- likely -- that continuing to hold shares in my Roth IRA would be too much of a headache. I know it's *possible* to keep holding private equity in IRAs, but it looks like I *might* have to switch to an IRA custodian who charges high fees and has terrible customer service and doesn't do paperwork right, which would probably be enough of a nightmare to make it not worth it (no investement is worth that kind of suffering).

This is better than RRSPs which have an outright ban on holding private company stock unless it's Canadian and controlled by Canadians (which Tesla is not). It seems like the only way to allow Canadians to retain TSLA in their RRSP would be to set up a stock-exchange-listed trust or partnership which owned TSLA, which possibly defeats a lot of the purpose of going private...

 

[eepic]

The poll should have a "not sure yet" option. I'm waiting to see the details on how the conversion would actually work. For each type of tax favored account.

It is possible -- likely -- that continuing to hold shares in my Roth IRA would be too much of a headache. I know it's *possible* to keep holding private equity in IRAs, but it looks like I *might* have to switch to an IRA custodian who charges high fees and has terrible customer service and doesn't do paperwork right, which would probably be enough of a nightmare to make it not worth it (no investement is worth that kind of suffering).

This is better than RRSPs which have an outright ban on holding private company stock unless it's Canadian and controlled by Canadians (which Tesla is not). It seems like the only way to allow Canadians to retain TSLA in their RRSP would be to set up a stock-exchange-listed trust or partnership which owned TSLA, which possibly defeats a lot of the purpose of going private...

Agreed that if they set up a publicly listed holding company or trust to hold TSLA, it's still going to trade and shorts will find their way in. So we'll see a similar amount of interest, attention, and noise. All that will change is less obligation to drill down to the details every quarter.

Also, good call on the "not sure yet" poll option but it looks like I can't change it anymore... can mods still edit?

 

[Muaddid]

Yeah all my TSLA are in my RRSP(REER) and TFSA(CELI) accounts, if I have to pull my shares out of this to keep investing, it will really hurt futur gain...

 

[angstrom]

I should note that I'm not against the idea, but rather the timing in my case since I'm pretty much a "permabull" holding long the only real annoyance is having to wait for liquidity events. In the event the economy takes a force majeure sh1t and falls into a brief recession the effects of that would be more muted in a private company.

 

[ggr]

Long term options will have to be liquidated, I think.

 

[Ocelot]

TL;DR If Tesla goes private, it may inadvertently force a lot of long term shareholders to sell some/all of their position.


I've been a believer in Elon and Tesla's mission for over five years now. I can comfortably claim that I am a true long term investor, having slowly (and painfully) accumulated a long position over the years without ever selling a share. Over the years I've spent thousands of hours researching and obsessing over every detail, and truly believe the upside is far beyond $420 in the longer term. Through the thick and thin, ups and downs, it's been tough but I've stayed disciplined and only ever timed the markets to decide entry points for new savings I want to deploy. I've spent the evening brainstorming how this conversion to a private company will affect my holdings as a Canadian and it's not looking good.


Possible Investor showstoppers to staying invested:
- Are only "accredited investors" eligible for the private investment vehicle? This would require a net worth (excluding residence) of $1 million or $200k income.
- Does your brokerage support the private investment vehicle or will they have trouble settling/clearing the conversion? This could be a concern for those with workplace restrictions on investments/brokers.
- Anyone who is using any margin for leverage will likely be forced to liquidate some of the position. However, given the nature of risks with margin accounts I don't think it's too unfair.


Canadian (and other International) Investors:
- Are Canadian and other international investors eligible to convert to the private at all?
- Can your brokerage support/clear/hold a US private investment vehicle?

Assuming those concerns are not an issue, there's still the problem of registered (tax-sheltered) accounts. I have TSLA in my "normal" non-registered brokerage accounts, my Registered Retirement Savings Plan (RRSP) account, and my Tax Free Savings Account (TFSA). The private investment vehicle will almost certainly NOT be eligible for the RRSP or TFSA in Canada (Designated Stock Exchanges). I understand programs like the Roth IRA are similar in nature to these Canadian accounts so there may be similar implications for Americans, but I don't know anywhere near enough to comment.

"RRSP" Account (Tax Deferral Account: Contribute pre-tax income, withdrawals count as taxable income when you take it out at retirement)
- Forced to liquidate at $420, this cash is tied up in the account.
- Moving shares or cash outside this account would trigger severe tax consequences, a 10-30% immediate withholding tax + income tax at your marginal rate. For non-retired working class in Ontario that's a net 30-83% tax hit which makes this an unrealistic option.

"TFSA" Accounts (Tax Shelter Account: Contribute post-tax income, gains inside are not taxed)
- Could withdraw outside the account and hold the private without the tax benefits on subsequent gains, which could be significant disadvantage in the long run.


Summary
In short, at best I will be able to hold private shares in some accounts but for tax-sheltered accounts I will likely be forced to liquidate (or take an unpalatable 30-83% penalty pulling shares/cash out to stay invested in the private shares). A really depressing day for me with this announcement, after years of planning and accumulating I don't want to be forced out of a large chunk of my Tesla investment at a paltry $420.

Same position.,but as I have never withdrawn from my RRSP..had no idea about the tax rates...,and just presumed it was the same as my income tax. So I would have 49 per cent AND 10 to 30 per cent on top of that. There is no way to make the math work and hold any position. Would be much better to liquidate and keep the money to reinvest inside the account than losing at least 60 per cent of my position.

Been a daily reader for years. Fighting the Tesla education fight for years...and then bam. Feels like a kick in the non-mouse nuts.

 

[lukex4]

Yeah all my TSLA are in my RRSP(REER) and TFSA(CELI) accounts, if I have to pull my shares out of this to keep investing, it will really hurt futur gain...

I'm in the same position. I hope Tesla finds a way around this...

 

[lukex4]

Same position.,but as I have never withdrawn from my RRSP..had no idea about the tax rates...,and just presumed it was the same as my income tax. So I would have 49 per cent AND 10 to 30 per cent on top of that. There is no way to make the math work and hold any position. Would be much better to liquidate and keep the money to reinvest inside the account than losing at least 60 per cent of my position.

Been a daily reader for years. Fighting the Tesla education fight for years...and then bam. Feels like a kick in the non-mouse nuts.

I don't think it's 10-30% on top of your marginal rate, it's just an immediate withholding. But I'm no expert so I could be wrong. In any case, the point of taking money out of RRSP at retirement is you should have a much lower marginal tax rate than right now.

I'm also super long #TSLA and it'll hurt a lot to sell for only 420$

 

[dhanson865]

I've got TSLA in a rolledover 401k at a retail broker. I'm assuming I can keep it but I don't know for certain. I bought in at sub 200 levels so a forced sale wouldn't make me too sad.

 

[eepic]

I don't think it's 10-30% on top of your marginal rate, it's just an immediate withholding. But I'm no expert so I could be wrong. In any case, the point of taking money out of RRSP at retirement is you should have a much lower marginal tax rate than right now.

I'm also super long #TSLA and it'll hurt a lot to sell for only 420$

Ah interesting maybe you're right, I haven't withdrawn from an RRSP before so I could be mistaken. Still the marginal rate alone still a dealbreaker.

 

[Ghostman]

Ah interesting maybe you're right, I haven't withdrawn from an RRSP before so I could be mistaken. Still the marginal rate alone still a dealbreaker.

My understanding is that the withholding tax is similar to companies withholding gross income on T4s and providing it to the CRA in expectations that you will be owing that amount in taxes. It will be credited when you file your tax return and if your marginal tax rate is lower, you get the refund. So net overall you are withdrawing money into your current year's income and paying taxes at your marginal tax rate.

Tax rates on withdrawals - Canada.ca

 

[Cal1]

The accredited investor concept has nothing to do with taking company private. It's based limiting damage to small uninformed investors initially trying to buy into a new company (Reg D) pre-IPO. There is no requirement for existing investors to be accreted. The rules says you can sell unregistered stock to no more than 35 non accredited.

This is not an attempt to get rid of small investors. He just want to stop the quarterly reporting craziness. Having to push production numbers to keep the analysts from complaining and the accompanying neg press is a pain. Not to mention causing stock price fluctuations.

 

[TSLA_Hopeful]

I spoke with Fidelity today. I have a further appointment on next Monday. But point being, given the amount of individual shareholders interested, it's likely Fidelity would do something to try and accomodate those owners going private. Depends on the trading volumes. Also, they said for private equity, there is no fees. This isn't an advertisement for Fidelity, but i think we should be okay. If anybody has questions, add it here and I'll ask them on Monday.

 

[KarenRei]

Really worried about this. Bought my shares through my bank. And I'm overseas. I have no bloody clue whether I'll be able to keep them. Hope we get some more flesh on this possible deal soon so that I have something I can take to my bank and say, "Will you be able to deal with this?"

 

[beachbum77]

The accredited investor concept has nothing to do with taking company private. It's based limiting damage to small uninformed investors initially trying to buy into a new company (Reg D) pre-IPO. There is no requirement for existing investors to be accreted. The rules says you can sell unregistered stock to no more than 35 non accredited.

This is not an attempt to get rid of small investors. He just want to stop the quarterly reporting craziness. Having to push production numbers to keep the analysts from complaining and the accompanying neg press is a pain. Not to mention causing stock price fluctuations.

Actually, it would not stop. If there are more than 2,000 investors regular reporting is required as I understand it. Also, who is going to pick the 35 non-accredited investors to join the private company?

The only person who was setting production goals was Musk himself. The analysts were just holding him to his promises.

 

[neroden]

The accredited investor concept has nothing to do with taking company private. It's based limiting damage to small uninformed investors initially trying to buy into a new company (Reg D) pre-IPO. There is no requirement for existing investors to be accreted.

Right -- I was wondering about that. So basically all existing shareholders are "grandfathered", since the accredited-investor rule only applies to *new buyers*. Can you find a confirmation of that? I was thinking that was correct but I wasn't sure.

Reporting would still be required with tons of investors. However, *trading would be heavily restricted* which would get rid of options and shorting, which I think Musk would like a lot.

 

[neroden]

I spoke with Fidelity today. I have a further appointment on next Monday. But point being, given the amount of individual shareholders interested, it's likely Fidelity would do something to try and accomodate those owners going private. Depends on the trading volumes. Also, they said for private equity, there is no fees. This isn't an advertisement for Fidelity, but i think we should be okay. If anybody has questions, add it here and I'll ask them on Monday.

I'm very likely to have to split the difference -- convert some of my stock to private equity and sell part of it in the tender offer. Is that going to be possible and *will I be able to assign which lots are which* because that could make a huge tax difference. (My main hunk of after-tax shares are currently at Fidelity.)

 

[Cirrus MS100D]

I have a small quantity of TSLA I bought the day after the IPO in my US Schwab 401k that’s run by a former employer. I have intentions of holding forever, but I wouldn’t be shocked if Schwab or the rules of my old company simply forced the sale :-/