"Going Private = Forced Liquidation" for many Investors

[Ulmo]

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 sure do!

1. I am in margin. I intend to liquidate my margin portion as close to the buyout offer or above as I can get, without having to put a great deal into buying the shares outright, and then the rest of the shares I have I want to continue to hold outright.
   1. Will I have this opportunity?
   2. How much of the shares I have can I direct the vote for going private while they are still in margin? Since I think this election will pass and I don't have a lot of shares, that isn't highly important to me, but it may be to others.
      
   3. Will I have the opportunity to sell my margin shares at a price of the buyout offer or higher in time to settle the trades before the "Record Date" for the election?
   4. If you have any view into it, how soon would I need to sell my margin shares in order to have my regular shares settled before the needed record date to participate in the private company?
   5. If I get to 100% equity of my shares, does it matter that the shares were bought with the "margin" flag? I assume they just convert to outright held shares.
2. Since I have under $1 million in assets and my income hovers between $50,000 and $95,000 per year on typical years, I cannot be an accredited investor. What opportunity will I have to become part of the private Tesla company fund?

 

[Ocelot]

I spoke with RBC direct investing today. Regardless of any federal laws their own rules state NO private investments can be held within an RRSP.

 

[anticitizen13.7]

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.

I believe that the Accredited Investor "problem" is something that retail investors should be watching closely.

I've collected some basic resources, directly from the SEC and U.S. government, for people to read:

Definition of an "Accredited Investor":

1. Explanation in plain language: Investor Bulletin: Accredited Investors | Investor.gov
2. Actual Regulation (original source) eCFR — Code of Federal Regulations[

Rule 506 of Regulation D:

1. Explanation in plain language: Rule 506 of Regulation D | Investor.gov
2. Actual Regulation (original source): eCFR — Code of Federal Regulations

From the plain language explanation of Rule 506:

"Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities."
​

The question I have, is: what does it mean to "offer" securities? If I own 10 shares of TSLA, and Tesla Inc. wants to exchange those 10 shares of TSLA for 10 shares of Private Tesla Inc., is that exchange an "offer"?

I note that "offer" and "sell" appear to be 2 different things, based on the government's interpretation.

Are there any attorneys or investment professionals who can comment?

 

[anticitizen13.7]

Another question I have:

It is common knowledge that SpaceX employees (many of whom, especially at the entry level, are likely not "Accredited Investors" IMO), receive SpaceX stock and stock options.

How do SpaceX employees get around the "Accredited Investor" regulations when they acquire SpaceX stock and options as part of their compensation?

 

[UnknownSoldier]

Another question I have:

It is common knowledge that SpaceX employees (many of whom, especially at the entry level, are likely not "Accredited Investors" IMO), receive SpaceX stock and stock options.

How do SpaceX employees get around the "Accredited Investor" regulations when they acquire SpaceX stock and options as part of their compensation?

They are employees which are explicitly exempt from this requirement.

 

[Owner]

They are employees which are explicitly exempt from this requirement.

Not exactly. Anyone receiving stock options does not fall into this same category. They are not putting in cash up front for shares when they are employed.
Accredited investors are for those putting cash up front into the company.
Technically a handful of employees could be doing both: working for stock options and investing. But that is rare. Typically if you have a few extra dollars, you'd likely to be an accredited investor in someone else's new startup for diversification.

 

[neroden]

I believe that the Accredited Investor "problem" is something that retail investors should be watching closely.

I've collected some basic resources, directly from the SEC and U.S. government, for people to read:

Definition of an "Accredited Investor":

1. Explanation in plain language: Investor Bulletin: Accredited Investors | Investor.gov
2. Actual Regulation (original source) eCFR — Code of Federal Regulations[

Rule 506 of Regulation D:

1. Explanation in plain language: Rule 506 of Regulation D | Investor.gov
2. Actual Regulation (original source): eCFR — Code of Federal Regulations

From the plain language explanation of Rule 506:

"Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities."
​

The question I have, is: what does it mean to "offer" securities? If I own 10 shares of TSLA, and Tesla Inc. wants to exchange those 10 shares of TSLA for 10 shares of Private Tesla Inc., is that exchange an "offer"?

I believe yes, it is. However, if Tesla *remains the same corporation* and simply *delists its stock* (turning it into unlisted stock of a public company), that's *not* an offer. So maybe that's the pathway to holding the shares.

I'm beginning to think that Tesla may remain "public" for SEC regulation purposes while delisting the stock and prohibiting trading. This is the only way I see to allow most investors to keep the stock. Retirement accounts will probably still consider the stock "private" though.

 

[Cal1]

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.

Again I think the intent of this Rule is being missed. Regulation D is there to prevent unregistered stock from being sold to "lay people" that are financially unsophisticated and unable to understand the risks associated with buying private placement stocks. Typically the 35 unaccredited investors are the friends, neighbors, relatives. Your shares were initially sold with a prospectus and required all kinds of disclosure. Once those shares have been sold there is no requirement for further disclosure on public resales as Tesla would not be getting the $. Private means that. Privately held companies disclosure requirements are a fraction of publicly traded. Could be good or could be bad. That's one of the main justifications for going back to private. Dell, Janus mutual funds, tons of others get tired of fighting public scrutiny. Many just don't ever go public. Hers one of my slides I use to get folks studying Series 7 to see that private companies have been around forever. They just never realized it. Sales figures are up to date. Just there to get them to see how much $ they're pulling in.

 

[neroden]

Again I think the intent of this Rule is being missed. Regulation D is there to prevent unregistered stock from being sold to "lay people" that are financially unsophisticated and unable to understand the risks associated with buying private placement stocks. Typically the 35 unaccredited investors are the friends, neighbors, relatives. Your shares were initially sold with a prospectus and required all kinds of disclosure. Once those shares have been sold there is no requirement for further disclosure on public resales as Tesla would not be getting the $. Private means that. Privately held companies disclosure requirements are a fraction of publicly traded. Could be good or could be bad. That's one of the main justifications for going back to private. Dell, Janus mutual funds, tons of others get tired of fighting public scrutiny. Many just don't ever go public. Hers one of my slides I use to get folks studying Series 7 to see that private companies have been around forever. They just never realized it. Sales figures are up to date. Just there to get them to see how much $ they're pulling in.
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See, I understand all this, but the real question is whether the SEC will frown on existing Tesla holders who are financially unsophisticated lay people *ending up* with unlisted, illiquid stock, even if it's not actually being sold or transferred to them (because they already own it).

If the SEC frowns on that, then all non-accredited investors in Tesla will be forced out before the stock is delisted.

 

[Ulmo]

See, I understand all this, but the real question is whether the SEC will frown on existing Tesla holders who are financially unsophisticated lay people *ending up* with unlisted, illiquid stock, even if it's not actually being sold or transferred to them (because they already own it).

If the SEC frowns on that, then all non-accredited investors in Tesla will be forced out before the stock is delisted.

There could be a consent form you have to file by a certain date to stay in.

Also, wouldn't our brokerages have to inform their clearing houses to transfer the shares to Tesla corporate to re-issue directly back to us? Who would administer those? Are there banks that do that, or is that mostly a corporate activity? Such as, I would log into ir.tesla.com and look at the next sale date and select what I want to do with that date, especially when they announce a price point.

 

[Darren Donovan]

I bought some shares at just below $300, so if this thing goes through, I'll get $420 per share? That's not a bad ROI.

 

[Az_Rael]

So how does one become accredited if they meet the requirements? Is that done through your broker or from Tesla? My few TSLA shares are in Vanguard, some in a Roth, some in a taxable. If they decide to give me the option to go private in my plebian non-flagship account with them, I am guessing I would then have to provide the paperwork to them.

I am fully expecting to be liquidated in the end. I only own a handful of shares, so I am guessing I will fall under some threshold of "too much hassle" even if I was eligible.

 

[bhtooefr]

If this is considered a new offering, you'd have to provide documentation to Tesla of your income or wealth, I'd guess.

(There's two kinds of offering that come to mind, from looking around, that would apply... one has no requirement that Tesla get proof of your being an accredited investor, and allows 35 unaccredited investors to participate, but cannot be advertised. If this is a new offering, I suspect it'd be counted as advertised, so the 35 unaccredited investors can't participate, and the accredited investors have to provide proof of their accreditation status.)

 

[Cal1]

See, I understand all this, but the real question is whether the SEC will frown on existing Tesla holders who are financially unsophisticated lay people *ending up* with unlisted, illiquid stock, even if it's not actually being sold or transferred to them (because they already own it).

If the SEC frowns on that, then all non-accredited investors in Tesla will be forced out before the stock is delisted.

Boy you seem to think the SEC/FINRA really cares! (intended sarcasm, not ridicule). Prospectuses required in registered securities sales (primary offerings, secondary block offerings) expressly state "these securities are not approved or disapproved" They simply allow them to be sold. It's like when you buy a used car. The fact you have a WA registration doesn't mean the car is ok. It's the same here. They are no going to let someone sell a fraudulent investment, they just make it clear that it's up to you the investor to do your own due diligence. The risks in investing in private companies is nothing new. Bringing in new investors to existing private companies happens all the time. They are trying to protect but only to a relatively small extent. They really don't have the time or resources. Policing existing shareholder ranks just is beyond their focus. FINRA has their hands full just keeping up with publicly traded companies. Sure you always have legal recourse but ... The can of worms they would be opening would be mind boggling.

 

[UnknownSoldier]

I bought some shares at just below $300, so if this thing goes through, I'll get $420 per share? That's not a bad ROI.

It's an absolutely terrible ROI if your expectations are the company will grow a lot more than 20%. Which is why a lot of investors who would be forced out are watching so closely. Especially since during the tweetstorm, Elon said he was looking for a way to let everyone stay in with no obvious method available for that to happen.

 

[c041v]

Total rookie question but: Is there a way for Tesla to make every existing Shareholder an "Employee" for say a $1/year salary, some minimum share requirement and no obligations or benefits in order to qualify to hold TSLA privately?

 

[Cal1]

So how does one become accredited if they meet the requirements? Is that done through your broker or from Tesla? My few TSLA shares are in Vanguard, some in a Roth, some in a taxable. If they decide to give me the option to go private in my plebian non-flagship account with them, I am guessing I would then have to provide the paperwork to them.

I am fully expecting to be liquidated in the end. I only own a handful of shares, so I am guessing I will fall under some threshold of "too much hassle" even if I was eligible.

The company selling you the shares is ultimately responsible. But the underwriters marketing the shares typically vet the bulk of the private placement. Telsa would have no idea what to do. They and most other issuers rely on the investment banks to take care of the underwriting. They would ultimately require some proof that you are worth x amount of $ to be classified as an accredited investor. Easily verified by bank and brokerage statements. If you need to use other assets ... like real estate, things become sticky. Most if not all accredited investors don't need to jump through hoops to do this. Also because this is not a public offering there are relatively few that will even be invited to join the club. Remember this is a private offering which means you and I would probably have no idea Tesla is even looking for additional $. This whole thing is about Tesla getting the $. Nothing to do with secondary trading once the shares are issued and outstanding. Technically after they go private the semi or annual opportunity to sell or by more would be more private placement.

Heres another thought, there's nothing that says an accredited investor has to stay rich to keep his shares. They don't go back to a guy that has lost all of his $ and say you have to turn your shares in cuz you're poor. Even if you claim bankruptcy. They just don't have that kind of manpower or interest.

 

[gjunky]

We have our TSLA shares at a regular brokerage firm. Bought them a long time ago and have happily watched it go up about 1800%.

If/when this delisting/privatising happens, does this mean

1. the existing shares need to be sold and are we forced to take the profit and thus tax hit?
   
2. Will this simply be some kind of transfer from public shares to private ones and the IRS won't hear / care about this?

We will have to sell part of the stock to pay for the tax hit if #1. Not really complaining about the profit but would have liked to have picked this time myself.

 

[Cal1]

We have our TSLA shares at a regular brokerage firm. Bought them a long time ago and have happily watched it go up about 1800%.

If/when this delisting/privatising happens, does this mean

1. the existing shares need to be sold and are we forced to take the profit and thus tax hit?
   
2. Will this simply be some kind of transfer from public shares to private ones and the IRS won't hear / care about this?

We will have to sell part of the stock to pay for the tax hit if #1. Not really complaining about the profit but would have liked to have picked this time myself.

1. NO!!! This is not a taxable event. You are simply exchanging one class of shares for another. You only possibly owe taxes if you sell something. You're not selling, you're exchanging. No different than buying a convertible bond and converting into common stock. You can have a huge paper gain (stock is worth more that your cost of the original bond) but until you sell the new shares you owe NOTHING. Character will be based on the original bond purchase date.

2. Correct the IRS is completely out of the picture. They only care about your cost basis (you responsibility to keep track of) and the character, how long you've held the stock.

If Tesla doesn't exchange for existing shareholders and you choose to not sell in their tender offering.... well there's the challenge. Tesla will no longer pay to have their shares traded on any exchange e.g. NYSE, American. I should point out that they can't force you to sell your shares. At least not directly e.g. demand you give them up/turn them in. BUT then resale market will be quite difficult. Kind of like selling your house without using REMAX or some real estate broker. Can be done but without Craigs List or E-bay how would you sell said house? A simple sign in your driveway could work but I doubt anyone would seriously rely on that. If Elon is right and we do get to keep them the go to method will be determined by Tesla on their stated open buy/sell timeline. I read it was annually but could be semiannually.

If you own a bond that has matured or been called they can't go to your house and demand you turn it in. They simply stop paying the interest payments. If you don't return the bond to the company they simply keep your $. If you come back later they (if they are still around) will give you back your $1000. If you wait too long and the company has changed hands, went bankrupt, merged...well there securities lawyers that specialize in trying to get your $ back. Getting full restitution can be a challenge. This one I do know from personal experience. We don't even talk about Grandpa's Kansas City Southern stock. Or what used to be Grandpa's stock.

Honestly this is probably already worked out. We would not be their first private investors.

 

[Johann Koeber]

Total rookie question but: Is there a way for Tesla to make every existing Shareholder an "Employee" for say a $1/year salary, some minimum share requirement and no obligations or benefits in order to qualify to hold TSLA privately?

No.

Bypassing the law is not allowed.