TSLA Market Action: 2018 Investor Roundtable

[Krugerrand]

Do we really care if they go long?

I do. I don’t think they deserve the opportunity.

 

[neroden]

for this offer, it doesn’t make sense to stay short when you have ample opportunity to cover (if you think there’s a chance the deal goes through) so let’s ignore that for now.

but, a trader can stay short into the effective date of a corporate action. seen it thousands of times. there’s no rule not to. although it’s still a zero sum game

depending on the offer type, the short either pays cash, ends up short new stock, or a combo of each. if, for rights offer, they collect cash (the strike, which would be out of the money vs market price of new shares of exercised, and are short new shares)

I guess this is true -- the broker who loaned the stock out can say "I know you can't return the stock, go ahead give me $420, since I won't be getting it from Mr. Musk."

This is up to the broker who's making the loan. The broker can choose to accept cash instead of demanding the stock back. The shorts better *hope* the broker accepts it because the way I read the brokerage contract *the broker doesn't have to*; the broker can recall at any time.

But the brokers might decide to let the shorts off easy at $420. You're right.

If the broker is lending stock from someone in the fully paid lending program, the broker definitely has to return it. If the broker is lending stock from someone who's bought it on margin... the broker ALSO has to return it, unless they margin-call the long stockholder first, and they risk the stockholder wiring the cash in to eliminate the margin loan. So the broker has some serious incentive to recall the stock.

If the broker is lending their own personal stock (as Fidelity might), however, then I guess they can just say "Hey, I don't care that you couldn't return the TSLA stock to me, I'll take the $420".

So we should see the availability of stock for lending reduced to the amount the brokers hold for their own account. The amount they're lending from third parties, they really should be getting ready to return, or the broker gets in big trouble.

 

[graphix25]

I contacted Fidelity my IRA provider. The basic answer is yes you can own private vehicles like real estate and private companies which are reviewed on a case by case basis by their private placement group. There are platform restrictions and hence review is required. Without the details of the private structure to be proposed by Tesla they can not provide any additional guidance. I think the worse case is we are going to have to all switch to a specific service provider platform and roll over our TSLA shares to allow for the conversion. Since Fidelity handles SpaceX I would suspect they will also be handling Tesla investment vehicle. We will likely have plenty of time to make whatever transition is required.

IRS only excludes certain items from being owned IRA:
Retirement Plans FAQs regarding IRAs Investments | Internal Revenue Service

Can an IRA Hold Closely Held Stock?
Can an IRA Hold Closely Held Stock?

What Can You Hold in Your IRA?
Beyond the usual retirement account investments of stocks, bonds and mutual funds, an IRA allows you to invest in real estate, precious metals, mortgages and businesses (either through loans or equity interests). Many IRA custodians do not deal with these types of assets, so you may have to set up a self-directed IRA to be able to invest in these less-common assets. A self-directed IRA allows you to make all of the investment decisions in the account, including buying and selling.

Rules for Closely Held Stock
A closely held business is one that has a limited number of shareholders. These companies are often private and do not transact in the stock market. You can invest in a closely held company in your IRA as long as you and your immediate family do not either work in the business, have other ownership interests in it outside of the IRA, or manage the business. In other words, you have to remain personally hands-off with your IRA investments.

Prohibited Transactions
There are several investments that you are not allowed to make in your IRA. The general rule to remember is that you and your close family cannot benefit from assets held in the IRA before you retire. You cannot, for example, invest in a rental property in your IRA and personally do the maintenance and collect rent. You also cannot participate in businesses whose shares or loans are held by the IRA. You cannot borrow money from the plan or pledge the assets against a loan. The IRS does allow some exemptions to the rules, but they must be applied for prior to initiating the transaction.

I contacted my broker (Schwab) regarding having an IRA account full of TSLA shares, and what would happen should Tesla go private, and I was told Schwab does not allow private equity in its IRA accounts so I would need to sell all the TSLA shares. I promptly told Schwab, bzzz, wrong answer, that means I have to find another broker.

Question: has anyone found ANY broker who will allow TSLAP shares in an IRA post-going-private?I guess I'm also wondering if this is an IRS/IRA rule, or a broker policy.

If a private-equity IRA broker exists, I gotta start planning to move my entire IRA over to that broker.

 

[jhm]

Not to play devil's advocate but wouldn't you want a fund manager managing your money to say the stock you own are worth much more than their current value or in this case the proposed private $420 price? How could they say anything else???

Reminds me of real estate agents, it's always a good time to buy!

I get your point, but he's talking about as stock the fund does not own, at least not yet. His concern is the possibility that the common share price might never approach the price of the private share at conversion. My view is that the common price will converge to the private price and that both prices are higher than $420, in which case there is no need for a higher cash out price. His worry is that the public and private prices will not converge, in which case he want more than $420 as an assurance.

 

[neroden]

Bloomberg: Terms of Service Violation

OK, this is pretty clear. Musk has lined up funding to go private, but it's from one or two large investors (maybe three or four). He and the Board don't like having that level of concentrated ownership -- more concentrated than Musk perhaps -- so they're trying to get a larger conglomerate so as to split up the control.

Makes perfect sense. Implies that the one or two who have agreed to provide funding are *not* demanding control (which makes sense to me -- they still get big, chunky stakes of Tesla and the company is free of a source of badmouthing).

 

[jhm]

Yes. For him to trade open-market at this time would be insider trading. He's in possession of material nonpublic information, namely *who* the funders he's lined up are. I believe his purchases a few months ago were the last.

He CAN, however, participate in the buyout/tender offer and be one of the people offering to buy shares at $420.

That's a good point. Would it also apply to the other funders? They would know at least some of the same MNPI.

 

[beachbum77]

All Tesla needs to announce is that it's got (a) some large percentage of shares outstanding signed up to continue with Tesla as a private company, and (b) funding to buy out the rest of the shares outstanding at $420, and the short-sellers *have* to get out.

You left out two important steps.

1) The Board has to review and approve the buyout offer as fair and reasonable.
2) The BoD then schedules a vote and must get 2/3 (I believe is the % in this type of action) of all shares to vote for approval. What might throw this into some question will be those being forced out and facing big capital gains taxes. Many could end up voting "no" wanting to hang in there to participate in the Tesla future earnings.

 

[lklundin]

you still have popcorn?

you could probably get a lot of money for that right now.

No, I actually ran out before the bell rang - intra-day planning is obviously not my thing.

More importantly, this morning I got my spouse's permission to tap into a common account. So while I am liquid enough to restock on popcorn before we open again, I am compared to yesterday now 117% long on TSLA, holding a nice round number...

So I should probably step away from the keyboard, and see what goes on outside the house.

 

[neroden]

I have wondered if an institution could internally transfer shares at zero cost versus having to sell into the market and buy into another fund. Of course, if they have limits on how much of any given company can be in a fund, they might still need new funds to be set up, and would have to then buy various other things to fill out those funds to not hit the limits, etc ....

Legally, every mutual fund is its own entity. An institution can move shares from one fund to another, but they must be "sold" from one fund to the other, at the prevailing market price, with gains and losses booked for tax purposes. (Or, if it's a private company... they may need the approval of the Board!)

 

[graphix25]

4 or 5 -- 5-10% owners is all that should be needed to make this transaction work. As discussed it's believed that only $15-$30b is needed to buy shares outstanding that are not going to roll over into the private shares. I think if they limit any single shareholder to a maximum of 10% it should be acceptable. We don't want to see someone come in buy 50% of the company. They can also change the voting right structure to give Elon and existing insiders super voting rights although that may be a bone of contention in the shareholder approval request they would rather avoid.

OK, this is pretty clear. Musk has lined up funding to go private, but it's from one or two large investors (maybe three or four). He and the Board don't like having that level of concentrated ownership -- more concentrated than Musk perhaps -- so they're trying to get a larger conglomerate so as to split up the control.

Makes perfect sense. Implies that the one or two who have agreed to provide funding are *not* demanding control (which makes sense to me -- they still get big, chunky stakes of Tesla and the company is free of a source of badmouthing).

 

[MP3Mike]

Rules for Closely Held Stock
A closely held business is one that has a limited number of shareholders. These companies are often private and do not transact in the stock market. You can invest in a closely held company in your IRA as long as you and your immediate family do not either work in the business, have other ownership interests in it outside of the IRA, or manage the business. In other words, you have to remain personally hands-off with your IRA investments.

Am I reading that wrong, or does that say that you can hold TSLAP in your IRA, but not if you also hold TSLAP in a normal after-tax brokerage account?

That would be a doozy of a restriction.

 

[oneday]

I contacted Fidelity my IRA provider. The basic answer is yes you can own private vehicles like real estate, private companies and are reviewed on a case by case basis by their private placement group. There are platform restrictions and hence review is required. Without the details of the private structure to be proposed by Tesla they can not provide any additional guidance. I think the worse case is we are going to have to all switch to a specific service provider platform and roll over our TSLA shares to allow for the conversion. Since Fidelity handles SpaceX I would suspect they will also be handling Tesla investment vehicle. We will likely have plenty of time to make whatever transition is required.

IRS only excludes certain items from being owned IRA:
Retirement Plans FAQs regarding IRAs Investments | Internal Revenue Service

Can an IRA Hold Closely Held Stock?
Can an IRA Hold Closely Held Stock?

What Can You Hold in Your IRA?
Beyond the usual retirement account investments of stocks, bonds and mutual funds, an IRA allows you to invest in real estate, precious metals, mortgages and businesses (either through loans or equity interests). Many IRA custodians do not deal with these types of assets, so you may have to set up a self-directed IRA to be able to invest in these less-common assets. A self-directed IRA allows you to make all of the investment decisions in the account, including buying and selling.

Rules for Closely Held Stock
A closely held business is one that has a limited number of shareholders. These companies are often private and do not transact in the stock market. You can invest in a closely held company in your IRA as long as you and your immediate family do not either work in the business, have other ownership interests in it outside of the IRA, or manage the business. In other words, you have to remain personally hands-off with your IRA investments.

Prohibited Transactions
There are several investments that you are not allowed to make in your IRA. The general rule to remember is that you and your close family cannot benefit from assets held in the IRA before you retire. You cannot, for example, invest in a rental property in your IRA and personally do the maintenance and collect rent. You also cannot participate in businesses whose shares or loans are held by the IRA. You cannot borrow money from the plan or pledge the assets against a loan. The IRS does allow some exemptions to the rules, but they must be applied for prior to initiating the transaction.

"You cannot benefit from assets held by the IRA."

Would this restrict you from owning a model s or Tesla energy products?

 

[neroden]

That's a good point. Would it also apply to the other funders? They would know at least some of the same MNPI.

I don't know for sure, but usually not; there is generally an allowance made for being able to trade secretly, as we know from the Saudi and Tencent purchases. (This secrecy allowance is NOT typically made for the CEO, however.) Once you're over 5% ownership, you have to declare your intentions, however, so watch for those filings...

Thinking about it, Musk actually could legally trade, because he's allowed to make insider trades provided they aren't "market manipulation", but he'd have to file the Form 4 basically instantly. So we know that he hasn't so far.

 

[neroden]

He didn’t claim everyone would be able to, neordan. He hoped he could find/there would be a way to include all whi wished to participate. There’s a difference.

"Def no forced sales" was the claim on Twitter that everyone would be able to. To his credit he backed off on that essentialy instantly and was saying he *hoped* he could include everyone within a couple of hours.

I want to be very clear about this: Musk tells the truth as he sees it, but sometimes he hasn't done his research. This was clearly one of those times, and as soon as someone told him "Hey, regulations may not let you keep *everyone*", he backed off and said he hoped he could include everyone. This is absolutely consistent with his behavior. Like thinking he could solve full self-driving by last year (it just wasn't possible).

 

[neroden]

"You cannot benefit from assets held by the IRA."

Would this restrict you from owning a model s or Tesla energy products?

No, arm's length commercial transactions are fine, otherwise you couldn't buy Exxon stock in your IRA and put Exxon gasoline in your car, which you blatantly can do.

It probably means you're prohibited from having a management position at Tesla -- and quite possibly prohibited from being an employee at Tesla.

 

[neroden]

I contacted my broker (Schwab) regarding having an IRA account full of TSLA shares, and what would happen should Tesla go private, and I was told Schwab does not allow private equity in its IRA accounts so I would need to sell all the TSLA shares. I promptly told Schwab, bzzz, wrong answer, that means I have to find another broker.

Question: has anyone found ANY broker who will allow TSLAP shares in an IRA post-going-private?I guess I'm also wondering if this is an IRS/IRA rule, or a broker policy.

It's broker policy.

If a private-equity IRA broker exists, I gotta start planning to move my entire IRA over to that broker.

See the thread on "self-directed IRAs". They can hold anything including private businesses and real estate, but the custodians are expensive and provide poor service.

 

[graphix25]

If indeed that is restriction it will impact a lot of folks who hold TSLA in both traditional cash accounts and IRA's. For me personally I have 80% of my position at the Fidelity IRA so not as big of a deal. I can live with a double in my cash account to allow for the conversion of my IRA shares to the private vehicle for long term holding (5-10 years). I suspect the purpose of the restriction is not have personal direct ownership and control in addition to owning in the IRA. It has to be a hands off vehicle which it would be in both cases. I suspect we are going to need some guidance when this proposal rolls out. A high quality FAQ by Tesla will be required.

Am I reading that wrong, or does that say that you can hold TSLAP in your IRA, but not if you also hold TSLAP in a normal after-tax brokerage account?

That would be a doozy of a restriction.

 

[tti_7]

While funny, Elon wouldn't do something like this. He warned shorts to get out. There's heartbreaking story posted today that he took part in, he's not void of compassion. Joнɴɴα on Twitter

Touching story. I followed the story to EM "Thanks!" only to find this... The $420 price for TSLAP is not a financial happen chance, I am sure EM was doing some rounding to get there, it's his way to laugh at the shorts. EM: 420 haha

 

[jhm]

I guess this is true -- the broker who loaned the stock out can say "I know you can't return the stock, go ahead give me $420, since I won't be getting it from Mr. Musk."

I suppose if a broker had a client that had elected to receive cash out, they would be in financial a position to take cash out payment from short in lieu of returning the stock. It get's trickier if a client has not yet decided or indicated whether they will take cash or private share for their common share. The broker would need to be in a position to supply whatever the client elected or an actual common share. So this exposes the broker to credit risk. I don't think a broker wants to find themselves in the position of being short on private Tesla shares, which is what they risk if they accept cash in lieu of an actual common share.

 

[neroden]

Am I reading that wrong, or does that say that you can hold TSLAP in your IRA, but not if you also hold TSLAP in a normal after-tax brokerage account?

That would be a doozy of a restriction.

Good catch, and probably correct.

This is confirming my decision to cash out my IRA stake. I'll just keep the after-tax / owned-outright part (and probably not all of that, because I need liquidity).