The SpaceX Sham – Dissent Magazine

The SpaceX Sham

The chief scandal of the AI boom is not the secretive financial machinations of tech oligarchs, but how much money they have raised on the open promise of an automated, transhumanist future.

On June 12, SpaceX went public at a valuation of $1.75 trillion, the largest IPO in history, minting Elon Musk into the world’s first trillionaire, at least for a few weeks. The company occupies a legitimate market niche as a private spaceflight vendor for NASA and as a global satellite-based internet services provider through Starlink. But its future value hinges on the ostensibly stratospheric growth potential of Musk’s other venture, xAI, which combines X (formerly Twitter) and Grok (the preternaturally bigoted, deepfake-producing large language model).

Musk merged SpaceX and xAI earlier this year before he took SpaceX public―not just to build data centers in space and to set up a colony on Mars with a million inhabitants, but to employ SpaceX’s fundraising potential to funnel capital into xAI’s increasingly expensive ambitions. Unlike just a year ago, SpaceX is now an AI company. Nearly 80 percent of its predicted $28 trillion total available market is tied to a hypothetical market for AI enterprise services.

Even without xAI tacked on, the company would be unprofitable. And yet, despite the various risk disclosures peppering Musk’s prospectus―including dry statements explaining that several “anticipated market opportunities” such as space tourism and human augmentation “do not currently exist”―the investment community at large bent over backward to get a piece of SpaceX stock. People wanted in, and badly. The IPO was a mass delusion event of astronomical proportions.

Although SpaceX stock has since fallen far below its IPO price, market behavior in recent weeks proves that the disclosures and the alarm bells were immaterial when there was money to be made on the way up. This latest naked demonstration of irrationality represents a sharp rebuke to the many progressives and consumer advocates who have long argued that corporate transparency and risk disclosure will bring market irrationality to heel, protect Americans from white-collar corruption, and democratize an inegalitarian financial system. The way markets contorted around the SpaceX IPO should put paid to these notions. Rather than be disciplined by the public markets, Musk bent them to his will. And we’re all caught up in it.

Even the most transparent markets will not govern themselves. Democratizing finance means taking aim at Big Tech’s oligarchic control over the economy, not giving them a level playing field.

The volumes of capital involved in the AI boom that is currently buoying xAI are truly immense. But, volume aside, this sector has the same financial building blocks as any other―including the ones that might give people pause, like off-balance-sheet special purpose vehicles designed to offload risk and private credit lenders who don’t often disclose asset performance. Arrangements like these are used throughout the financial system to speed along the development of all sorts of projects. But the fundamental opacity of these financial structures―how they shift risks without disclosing them―offends our sense of moral economy. 

In most of my conversations with congressional staffers, community advocates, antitrust lawyers, and journalists (much of which followed from my work at the Center for Public Enterprise), people were as worried about the AI boom’s lack of financial transparency as they were about the sector’s structural unprofitability and the way that hyperscaler tech giants are reshaping our economy. AI makes no money, and its risks are being squirreled away into the financial system? Do the broligarchs have something to hide? Americans smell a rat.

Nowhere is this anxiety about hidden risks and investments that are too good to be true more prevalent than in the debates about private credit, the catch-all term for the gaggle of non-bank lending institutions that originate and trade billions of dollars of loans without supervision by the Federal Reserve. (Many Americans previously encountered private credit as “shadow banks” in the hangover of the Great Recession.) Private credit lenders, such as Blackstone, Apollo, KKR, and Blue Owl, are large and important investors: They take capital from institutional investors like pension funds, insurance companies, and asset managers and provide it to borrowers across the economy. Where the AI boom is concerned, it’s sometimes hard to tell just how much they’ve lent to the tech giants and on what terms. But we do know that when Musk’s xAI was still separate from SpaceX, it arranged for an off-balance-sheet subsidiary to borrow billions from private credit fund manager Apollo to purchase graphics processing units (GPUs) for data centers.

Last fall and early this year, jitters in the AI market and the failure of a few high-profile private lending transactions drew significant media attention to the performance of private credit firms, many of which have taken long and confident positions in the future of AI. Many journalists and analysts―myself included―fretted about the potential exposure that pension funds and retirement accounts had to a market crunch in the AI sector, thanks to their private credit liabilities. Progressive-minded policy analysts, consumer protection watchdogs, market commentators, and Senator Elizabeth Warren all converged on a call for greater transparency and disclosure in the private credit market, tied to a broader vision for the democratization of finance defined by market supervision and information access.  

The logic of this recommendation is that open and transparent risk disclosure will prompt investors to change their behavior―either through facilitating consumer advocates’ ability to pressure corporations into more pro-social behavior, or through impelling investors to reallocate away from investments they didn’t realize were so risky, or both. ESG metrics should, by this logic, prompt investors to reallocate capital away from harmful companies; climate risk analysis will prompt bond rating downgrades; and private credit supervision will unveil all the market’s risky and inflated gambles on AI. In an open market, the truth will out. Or so the story goes.

Unfortunately for market transparency advocates, the truth is out―and nobody cares. The record demand for SpaceX’s June 12 IPO immediately made it one of the world’s most valuable companies. Its pre-IPO valuation put its price-to-earnings ratio (a proxy for investors’ expectations for the company’s revenue growth) over four times higher than that of NVIDIA, the leading GPU manufacturer whose revenue has skyrocketed during the AI boom. Upon SpaceX’s big debut, its valuation immediately hurtled past $2 trillion. Never mind that SpaceX is unprofitable or that AI is a cash sink. The first month after the IPO, on the equity side of things, there was little in the way of buyers’ remorse. 

Negative coverage of the IPO was limited due to the participation of so many major banks in the IPO process; they don’t want to poison the cash cow they’re milking for underwriting fees. Many of those banks also lent to SpaceX when it was a private company and helped to fund its merger with OpenAI in preparation for the IPO. These arrangements are not unheard of in the world of investment banking, but, with such large volumes of cash on the line, it’s hard not to argue that lenders shared an interest in leveraging a successful IPO to quickly lift their concentrated exposure to SpaceX off their balance sheets.

Public disclosures did little to temper investors’ enthusiasm for the company. To the contrary, the sheer mass of this IPO, like the gravitational pull of a giant star, has reshaped markets around it in unprecedented ways―most noticeably through changes to index funds’ inclusion rules.

Index providers like the Nasdaq, which track the overall market and various groups of companies for the purpose of providing “thematic” and whole-of-market investment opportunities to interested investors, will re-weight their indices to include public companies that meet their inclusion rules. Passive index funds will buy shares in those companies in line with the index providers’ weights and at market prices―thus providing public companies with predictable demand for their stock issuance that early holders, including many retail and institutional investors, can sell to liquidate their position. In return, the index funds provide market participants with the returns of the overall index, rather than of any individual company.

For all that SpaceX is worth, the IPO only made about 5 percent of the company’s stock available to be traded among shareholders. There remains more privately held stock to be sold into the market as various employees and early private investors reach the end of their “lock-up” periods in the coming weeks and months. (The first of those lock-ups ended on August 6, more than doubling the number of publicly tradable shares and putting the company at about a 12 percent open float.)

SpaceX’s limited public float, combined with its unprofitability and the sheer recency of its IPO, would usually have it failing to meet most criteria for index inclusion. But it was still worth so much and carried so much investor demand that the Nasdaq was prompted to modify their index inclusion rules to ensure SpaceX’s speedy addition. SpaceX no longer needs to wait a year, nor does it need to float much of its shares on public markets, to take its place in the portfolios of some of the biggest index funds. Investors in passive funds that track these indexes now have their portfolios weighted toward SpaceX’s outsize position within them. Moreover, SpaceX’s quick inclusion makes IPO investors less price-sensitive, since they know index funds capitalized by passive investors will be buying shares in bulk in the near-term. 

The S&P initially proposed, in line with its peers, to modify its rules to quickly include SpaceX in the S&P 500―the most prestigious index, preferred by the biggest passive index funds―but ultimately declined to modify its criteria to do so. That means BlackRock’s IVV and Vanguard’s VOO, two popular passive index-tracking funds, will for now remain free from SpaceX exposure. But there are many shareholders in other index funds who, despite a potential preference for avoiding a company with such uncertain and overvalued prospects, are now forced to prop it up.

Do the index inclusion rule changes really give passive investors the most “accurate” picture of the stock market? Or are they a rug-pull designed to quickly provide price-insensitive exit liquidity to the early investors of massive companies like SpaceX—and thereby to pass on their risks to others? SpaceX’s sheer size is a point in favor of both perspectives. But one thing that nobody can dispute is that, even though S&P’s late-game retreat shields a good chunk of passive investors from SpaceX (for now), the rest of the “Magnificent Seven” tech giants still represent over 30 percent of the total valuation of the S&P 500. These companies make up such a large share of the stock market and its various tracking indices that any attempt to diversify one’s investment allocations away from them and to avoid over-exposure to tech means to sacrifice returns.

Musk, meanwhile, basking in the world’s interest in his companies, has diverged from IPO precedent by issuing shares of stock that are designed to give shareholders virtually no control over the company. Most stocks issued on public markets come with a common set of corporate governance rights. Larger shareholders, such as institutional investors and index funds, therefore have meaningful sway over the transparency and operation of the companies they’re invested in. But Musk has stripped control from his shareholders and hollowed out the nature of their ownership. The share structure is designed such that he retains total control of the company and can appoint most of the board of directors, regardless of other shareholders’ wishes. SpaceX’s share structure also does not allow public shareholders to bring most kinds of shareholder lawsuits against him, or to amass the voting power to do so in the first place. 

It turns out the corporate governance rules that most investors take for granted were never set in stone. In fact, the existence of public SpaceX stock belies Musk’s total control. Three of the country’s largest public pension funds called SpaceX’s governance structure “the most management-favorable governance structure ever brought to the U.S. public markets at this scale.” But it seems like they will invest in spite of their own concerns; their fiduciary duty to pensioners will trump their concerns over SpaceX’s corporate governance.

As a percentage of any of our individual allocations, or of a pension fund’s allocation, SpaceX still will not claim too large a share. But the principle matters: The upshot is that the country’s retail investors, its small-cap retirement savers and pensioners, are all but forced into supporting Musk’s company and, by extension, his dreams.

The potential IPOs for Anthropic and OpenAI, which are expected within the coming year but have not yet been scheduled, are both reportedly targeting IPO valuations above $1 trillion. Like SpaceX, those valuations will immediately put their shares into passive funds tracking the Nasdaq. It is also quite possible that their founders will engineer the same kind of share control that Musk did. So long as the AI investment boom hasn’t crashed by then―you never know!―the results of these enormous IPOs will likely be similar: a mad dash to participate and the perpetuation of the AI investment boom as a consequence of all the liquidity that floods into the sector. In short, the turn to public markets may end up propping up the hype around this quite fragile sector rather than discipling it. Transparency doesn’t temper animal spirits; animals dash into glass doors all the time.

Of course, financial markets still exercise some gravity to pull orbital valuations back to earth. Fermi, a nuclear power and data center developer led by former Texas governor Rick Perry―who promised to name the company’s nuclear reactors after Trump―went public to much fanfare last year, but it has been falling apart ever since. Once valued at $15 billion, the company is now worth maybe just $4 billion, and its CEO was fired to boot. Venture Global, a natural gas exporter, went public last year and similarly flopped. 

SpaceX may yet suffer the same fate, as lock-up periods expire, early investors finish selling their positions, and more market analysts and short sellers start questioning the assumptions behind the IPO. SpaceX bonds are already trading poorly. As of August 6, SpaceX stock is down around 20 percent below its IPO price and more than 50 percent from its peak valuation in the days after the IPO. Still, Musk will no doubt find ways to prop up his assets’ value, if not by riding the hype then by fusing himself with the state through increasingly ambitious public-private partnerships. Perhaps he will even arrange for SpaceX to buy Tesla. The events of the past few months suggest that markets will love it before it happens. They will only disapprove after the fact.

Regardless of how its shares fare, the fragility underlying the AI boom means that SpaceX and its peers might collapse anyway. But even if what goes up someday comes down, the ascent of SpaceX and its fellow tech giants is creating incredible amounts of paper wealth in the form of appreciating stock portfolios and creditworthy debt―both of which investors can recycle into more tech startups, data center projects, and venture capitalists’ visions of an AI-powered future. Their investments, collateralized by their wealth and juiced by retail and institutional investors (consensually or otherwise), are already transforming our economy, and it’s hard to argue that such transformations are in our interest. 

Haggling over how markets should or shouldn’t behave is almost beside the point when tech oligarchs can use them in both their private and public forms to advance their dystopian visions of the world. The democratization of finance must be achieved by other means than giving the mass of investors the best possible access to information―because it’s clear that the promise of cashing in on a mania jingles louder than a sheaf of S-1 disclosures.

The chief financial scandal of the AI boom is therefore not that the tech companies are cooking their books. While uncertain assumptions about line items like depreciation litter the tech giants’ disclosures, there is no convincing evidence of accounting fraud. The real scandal is how much capital the tech oligarchs have been able to raise on the promise of an automated, even transhumanist, future.

Progressives would do better to advocate single-mindedly for the kind of economy we really want―an egalitarian one, free from oligarchic control over the shape of our shared future―than to couch our distaste for the state of things in accusations of skullduggery. In other words, we must fight these nightmare visions of the future directly and champion the kind of anti-oligarchy and anti-corruption politics that could meaningfully roll back elite control of our economy. That means stronger progressive income taxation, more punitive capital gains taxation, social media regulation, support for public news media, and immediate campaign finance reform.

These reforms are distinct from proposals to tax AI and data centers, which would merely help redistribute and socialize the gains of an industry that continues to grow. Taxing AI would do little to cut down on the influence of Silicon Valley; in fact, it would all but legitimize its dominance. Anti-oligarchy initiatives, on the other hand, have a distinctly more productive effect: They help disempower Silicon Valley elites (and whatever class of dystopian entrepreneurs comes after them) from irrevocably twisting the direction of markets, the investment landscape, and the future of the economy in their interest. The public can instead reinvest its collective wealth into the kind of egalitarian economy we deserve—one that, at a minimum, protects the dignity of education and labor, which tech oligarchs seem so keen on detonating.

Advait Arun is an infrastructure finance and climate policy analyst at the Center for Public Enterprise. He writes about climate, finance, data centers, and politics, and edits the Caravanserai magazine for policy and culture. The views expressed here represent the author’s personal opinions alone and not those of their employer.