SpaceX, the aerospace company owned by Elon Musk, permits Chinese investors to acquire shares as long as the transactions are conducted through offshore secrecy hubs such as the Cayman Islands, according to court records that had not been previously reported.
This glimpse into SpaceX’s operations recently surfaced during a corporate dispute in Delaware that led to testimony from SpaceX’s Chief Financial Officer and Iqbaljit Kahlon, a significant investor.
In testimony from December, Kahlon indicated that SpaceX generally steers clear of investors from China due to its status as a defense contractor. Nevertheless, the company deems it permissible for Chinese investors to purchase shares indirectly via offshore entities.
“We typically see these investors utilizing setups like BVI or Cayman structures or sometimes through Hong Kong,” Kahlon stated, referring to the British Virgin Islands by the acronym BVI. Such mechanisms are frequently employed to safeguard investor anonymity.
Experts have noted that SpaceX’s method is atypical and express concern over a defense contractor potentially taking actions to obscure foreign ownership interests.
Kahlon, maintaining close ties with SpaceX’s leadership, claims ownership of a substantial amount of SpaceX shares valued in the billions. Acting as an intermediary, his investment firm raises capital from investors to purchase SpaceX shares, including capital routed from China via the Caribbean multiple times, as suggested by court filings.
The legal disagreement stems from a canceled 2021 deal after a Chinese firm’s intent to buy $50 million worth of SpaceX stock became public knowledge, irking SpaceX executives. The company then nullified the purchase. In a separate testimony, SpaceX’s CFO remarked that the media attention was not beneficial due to their role as a government contractor. SpaceX’s operations rely heavily on government contracts, performing tasks like developing a classified spy satellite network for the U.S. government.
SpaceX’s executives expressed apprehensions that such media exposure might attract scrutiny from national security regulators in the United States, as per Kahlon’s testimony and his attorneys’ documentation.
SpaceX, which also executes rocket launches for NASA and provides satellite internet services, represents a fundamental part of Musk’s financial portfolio. Musk’s estimated 42% ownership of SpaceX is valued at around $150 billion, rendering him wealthier than Bill Gates.
Federal legislation grants regulators the authority to monitor foreign investments in technology firms and defense contractors. While there are no strict requirements for companies to disclose Chinese investments regularly, companies only have to do so in certain situations. Federal authorities, however, hold the power to investigate and potentially block or revoke transactions considered national security threats, especially when they involve tangible investments as opposed to minor, passive interests. Experts claim that U.S. officials often inquire companies to consolidate and disclose their total Chinese investments.
The U.S. government alleges that China employs strategic investments, even if minor, to gain leverage and access to sensitive information in key sectors. U.S. regulators often perceive even private Chinese investors as possible operatives of their government, experts suggest.
The new documentation doesn’t allege that the Chinese investments in SpaceX breach the law or are orchestrated by the Chinese government. While SpaceX declined to answer ProPublica’s detailed questions, Kahlon also refrained from explaining the rationale behind SpaceX’s practices.
It’s relatively commonplace for foreign investors to purchase U.S. stocks via Cayman Islands structures, often for tax-related reasons. However, experts found it unusual for a U.S. company to favor such arrangements for obfuscation purposes.
ProPublica consulted with national security and corporate attorneys, as well as experts on Chinese finance regarding the SpaceX revelations. Most were unfamiliar with any U.S. company mandating such requirements, hypothesizing it could serve to obscure Chinese ownership. Only one expert acknowledged hearing of companies employing such practices to conceal foreign investments.
“This appears to be a policy of obfuscation,” commented Andrew Verstein, a law professor at UCLA focusing on defense contractors. “It suggests potentially severe issues. Governmental entities expect transparency from companies regarding any financial dealings with America’s adversaries.”
This emerging information heightens scrutiny on Musk’s extensive connections with China, becoming more salient following his involvement with the Trump administration. Musk has routinely met with Chinese Communist Party officials to discuss his ventures in China, a country where approximately half of Tesla’s vehicles are manufactured.
Recently, The New York Times reported Musk was to receive a briefing on potential war strategies between China and the U.S. This briefing was later canceled, with former President Trump refuting its existence. Trump noted the impropriety of presenting such plans to Musk due to his business activities in China: “Elon’s businesses in China make him potentially susceptible,” Trump remarked.
The Delaware court revelations disclose SpaceX insiders’ intense focus on secrecy regarding China and describe an intricate network of intermediaries facilitating SpaceX shares’ sale to enthusiastic Chinese buyers. Unlike publicly traded companies, SpaceX holds significant control regarding who can acquire its shares, possessing the ability to intervene and halt sales even among external parties.
However, the case does not clarify the exact ownership percentage of SpaceX held by Chinese investors.
The Financial Times earlier reported that Chinese investors have acquired minor stakes in SpaceX, typically routed through offshore structures to limit investors’ access to detailed information. The Delaware records uncover further, previously unreported Chinese investments in SpaceX without specifying their total value. The publicized Chinese investments in SpaceX fall below $100 million.
Experts suggest the court proceedings raise enough questions to speculate that SpaceX might possess more substantial ties with China than is publicly recognized, potentially attempting to conceal this from U.S. regulators. Alternatively, they suggest SpaceX might aim to avert media or Congressional scrutiny over legally compliant investments.
Chinese investment, once a welcomed cash flow source in Silicon Valley, has become contentious in Washington, particularly as U.S.-China tensions have escalated. Corporate attorneys advised against stipulating offshore usage due to perceptions of concealing information from the government.
Bret Johnsen, SpaceX’s CFO, during his testimony in Delaware stated that the company lacks a formal policy on accepting investments from nations labeled adversaries by the U.S. Instead, SpaceX has “preferences akin to a policy.” Johnsen emphasized the importance of avoiding financial connections that might complicate securing government contracts and advised fund managers to “steer clear of ownership interests from countries like Russia, China, Iran, and North Korea.”
Though unasked during his public deposition about the propriety of routing Chinese investments offshore, Johnsen corroborated Kahlon’s statement that it was sufficient to ensure company approval. He affirmed a longstanding relationship with Kahlon and discussions relating to SpaceX’s approach towards Chinese ownership with him, noting his trust in Kahlon to secure only pre-approved investors.
Throughout the years, Kahlon has facilitated Chinese investors acquiring stakes in SpaceX via proxies such as BVI or Cayman Islands-based entities on numerous occasions, according to a filing from his legal team, and is aware of “many” other Chinese investors owning SpaceX shares through dialogue with investors and brokers as well as from “having viewed investor lists.”
Kahlon, a well-established SpaceX insider, “has been with SpaceX in some capacity longer than I have,” Johnsen remarked. Early in his career, Kahlon worked alongside Peter Thiel at the same venture capital firm as JD Vance and first engaged with SpaceX around 2007, not long after its founding.
Kahlon later inaugurated Tomales Bay Capital, forming a prominent figure among intermediaries catering to prospective SpaceX investors. His clients include former Education Secretary Betsy DeVos in acquiring stakes in the company. Additionally, he served as a “back channel” facilitator between SpaceX and international regulators during the company’s attempts to introduce its satellite internet products in countries like India.
The 2021 deal with a Chinese firm disintegrated, resulting in extended litigation, compelling Kahlon and Johnsen to testify. That year, Kahlon negotiated to purchase over half a billion dollars’ worth of SpaceX stock from a private equity firm in West Palm Beach. He had previously introduced Chinese funds into SpaceX, pivoting to Chinese investors again when assembling resources to acquire the stake.
Kahlon subsequently connected with a Shanghai-based enterprise named Leo Group, an acronym for “Love Each Other.” During preliminary pitches, Leo was told that it was preferable not to disclose SpaceX’s name, an executive from the Chinese company later attested, deeming the information “quite sensitive.”
Leo swiftly transferred $50 million to Kahlon, who simultaneously reached out to another contact in China, querying their interest in SpaceX investments.
Testifying, Kahlon indicated plans to inform Johnsen of the Leo deal, anticipating CFO approval. Nonetheless, the situation complicated after Leo mentioned SpaceX in a regulatory filing, attracting attention throughout China’s business media. The subsequent disclosure’s authorization between Kahlon and Leo remains contested. Amidst the turmoil, Kahlon sought a Leo executive’s assistance in retracting the coverage. As Johnsen and Tim Hughes, SpaceX’s primary in-house lobbyist, noticed the scrutiny, their concerns heightened.
“This is detrimental for us as a government contractor,” the SpaceX CFO later asserted, referencing the media exposure. “It effectively equips competitors with a narrative against us.”
“In my entire career, I hadn’t encountered a crisis as dire as this,” Kahlon admitted, acknowledging a failure in meeting a fundamental responsibility within their partnership.
Ultimately, SpaceX sanctioned Kahlon to purchase only a reduced portion of the stake, acquiring a majority of the half-billion-dollar investment themselves. According to Kahlon’s communications and testimony, this decision was influenced by Musk. Yet, despite the mishap, Kahlon retained a favorable rapport with SpaceX thereafter, continuing to purchase substantial amounts of shares through his firm, as per court records.
Beyond SpaceX’s ownership framework, Musk’s business endeavors in China have occasionally drawn criticism, particularly from Republican legislators. In 2022, after Tesla inaugurated a showroom in the Chinese region known for Uyghur internment camps, then-Senator Marco Rubio tweeted that “nationless corporations” were complicit with the Chinese Communist Party’s atrocities.
Aside from Tesla’s expansive factory in Shanghai, about 40% of Tesla’s sales in the previous year catered to Chinese customers. The company has also garnered significant tax incentives and regulatory favors within China. In 2019, Musk was offered a Chinese green card equivalent by the nation’s premier.
More recently, Musk has expressed conciliatory remarks concerning China’s intentions regarding Taiwan and praised its governance. “In my dealings with the Chinese government, I find them notably responsive to the populace,” Musk commented near the conclusion of Trump’s initial term. “In some respects, possibly more accommodating to people’s welfare than in the United States.”
