This article was first published by ProPublica, a Pulitzer Prize-winning analytical news website.
Elon Musk’s aircraft large SpaceX allows owners from China to acquire stakes in the business as long as the money are routed through the Cayman Islands or other offshore privacy centers, according to previously unidentified court records.
Recently, a unique instance of SpaceX’s strategy was revealed in a hidden-in-the-radar business debate in Delaware. Both SpaceX’s chief financial officer and Iqbaljit Kahlon, a big investor, were forced to testify in the case.
Because it is a defence contractor, SpaceX prefers to avoid Chinese investors, according to Kahlon in December. There is a big exception, though, he said: SpaceX finds it “acceptable” for Foreign investors to buy into the business through offshore cars.
According to Kahlon,” the main mechanism is that those investors may come through intermediaries that they would create or that others would create.” ” Usually they do set up BVI buildings or Cayman buildings or Hong Kong institutions and various other people”, he added, using the letters of the British Virgin Islands.
Buyers are frequently kept anonymous by offshore cars. Researchers called SpaceX’s view strange, saying they were troubled by the possibility that a defense contractor may take active measures to mask foreign ownership passions.
Kahlon, who has long been close to the company’s authority, claims to be a billion-dollar stockholder. His investment company also acts as a mediator, raising money from investors to buy very sought SpaceX stocks. According to the court files, he has used funds from China to acquire stakes in SpaceX several times through the Caribbean.
The legal dispute centers on an aborted 2021 deal, when SpaceX executives grew angry after news broke that a Chinese firm was going to buy$ 50 million of the company’s stock. The order was finally cancelled by SpaceX.
In separate evidence, the jet company’s CFO explained that the media policy was” not good for our business as a government contractor”. The US government pays the company billions to handle sensitive work, such as creating a classified spy satellite network, and SpaceX’s business is built on those contracts.
Company executives were concerned that coverage of the deal could lead to problems with national security regulators in the US, according to Kahlon’s testimony and a filing from his attorneys.
Perhaps the most significant pillar of Musk’s fortune is SpaceX, which also launches rockets for NASA and sells satellite internet service. His estimated 42 % stake in the company is valued at around$ 150 billion. He would still be wealthier than Bill Gates if he had nothing else to own.
Federal law gives regulators broad power to oversee foreign investments in tech companies and defense contractors. There aren’t hard and fast rules for how much is too much, and companies only have to proactively report Chinese investments in limited circumstances.
However, the government can initiate investigations and then block or reverse transactions deemed national security threats. A foreign investor who only purchases a small percentage of a company typically does not have that authority. But experts said that federal officials regularly ask companies to add up Chinese investments into an aggregate total.
The US government claims that China consistently seeks to gain exclusive access to information about cutting-edge technology by using even minority investments to gain control over businesses in sensitive industries. US regulators view even private investors in China as potential agents of the country’s government, experts said.
The new materials do not contain any claims that China’s investments in SpaceX would be in contravention of the law or were directed by the Chinese government. The company did not respond to detailed questions from ProPublica. The reasons behind SpaceX’s strategy were left open, according to Kahlon.
It’s not uncommon for foreigners to buy US stock through a vehicle in the Cayman Islands, often to save money on taxes. However, experts said it was odd for the US company, the party on the other side of the deal, to favor such a compromise.
ProPublica spoke to 13 national security lawyers, corporate attorneys and experts in Chinese finance about the SpaceX testimony. Twelve people claimed they had never heard of a US company with this requirement and that there was no other reason to do it besides concealing Chinese ownership of SpaceX. The 13th said they had heard of companies adopting the practice as a way to hide foreign investment.
According to Andrew Verstein, a UCLA law professor who has studied defense contractors, “it is undoubtedly a policy of obfuscation.” ” It hints at potentially serious problems. We rely on businesses to be honest with the government about whether they have benefited from America’s rivals.
The new material adds to the questions surrounding Musk’s extensive ties with China, which have taken a new urgency since the world’s richest man joined the Trump White House. Musk has regularly met with Chinese Communist Party officials to talk about his business interests, which are the basis of the majority of Tesla cars.
Last week, The New York Times reported that Musk was scheduled to get a briefing on secret plans for potential war between China and the US. Trump later claimed that the briefing had been postponed, and that the Times later reported that.
The president told reporters it would be wrong to show the war plans to the businessman:” Elon has businesses in China, and he would be susceptible perhaps to that”, Trump said.
The Delaware court records detail a network of independent middlemen selling SpaceX shares to eager Chinese investors and reveal SpaceX insiders ‘ intense obsession with secrecy in China. ( Unlike a public company, SpaceX exercises significant control over who can buy into the company, with the ability to block sales even between outside parties. )
However, the inquiry into exactly what proportion of SpaceX is owned by Chinese investors remains unanswered.
The Financial Times recently reported that Chinese investors had managed to acquire small amounts of SpaceX stock and that they were turning to offshore vehicles to do so. According to the outlet, the deals were designed to restrict the information investors could access.
The Delaware records reveal additional, previously unreported Chinese investments in SpaceX but do not say how much they were worth. Under$ 100 million was invested in SpaceX by China, making only a small portion of the total.
The experts said the court testimony is puzzling enough that it raises the possibility that SpaceX has more substantial ties to China than are publicly known and is working to mask them from US regulators. They claimed that SpaceX is trying to avoid being scrutinized for perfectly legal investments by the media or Congress. This is a more innocent explanation.
Once a welcome source of cash, Chinese investment in Silicon Valley has become the subject of intense debate in Washington as hostility between the two countries deepened in recent years.
Corporate attorneys told ProPublica they would advise their clients against requiring the use of offshore vehicles because it might give the impression that they are trying to conceal something from the government.
Bret Johnsen, the SpaceX CFO, testified in the Delaware dispute that the company does not have a formal policy about accepting investments from countries deemed adversaries by the US government. Instead, he claimed, SpaceX has “preferences that kind of feel like a policy.”
Sensitive to how such financial ties could make it “more challenging to win government contracts”, Johnsen said that he asks fund managers to” stay away from Russian, Chinese, Iranian, North Korean ownership interest”.
Johnsen wasn’t asked in the public portion of his deposition whether SpaceX was tolerant of routing Chinese money offshore. But he lent credibility to Kahlon, the investor who said that was enough to get the green light.
Johnsen stated that he has a long-standing personal connection with Kahlon and that he has spoken with him about how the business views Chinese ownership. The CFO added that he trusts Kahlon to bring in only investors that the company approves of.
According to a filing from his attorneys, Kahlon has personally assisted Chinese investors in purchasing stakes in SpaceX on” a number of occasions” through “proxies such as British Virgin Islands- or Cayman Islands-based entities. He also knows of “many” other Chinese investors who own SpaceX shares, the filing said. He learned about them from conversations with investors and brokers, as well as “from having viewed investor lists.”
Kahlon is a consummate SpaceX insider. He “has been with the company in one form or fashion longer than I have,” according to Johnsen, who has been with SpaceX for 14 years. Early in his career, Kahlon worked for Peter Thiel at the same venture capital firm that once employed JD Vance, and he first met with SpaceX around 2007 a few years after it was founded.
Kahlon eventually founded his own business, Tomales Bay Capital, and rose to prominence among the middlemen who serve would-be SpaceX investors. He’s helped people like former Education Secretary Betsy DeVos buy pieces of the rocket company. He added that as a result of the company’s efforts to export its satellite internet products to nations like India, he has also served as a “back channel” between SpaceX and international regulators.
Kahlon and Johnsen were forced to testify after the deal with a Chinese firm fell apart in late 2021, sparking years of litigation. In the same year, Kahlon had the option to purchase more than half a billion shares of SpaceX from a private equity firm in West Palm Beach. Kahlon had already brought Chinese money into SpaceX before, he testified, and he again turned to China as he gathered funds to purchase the stake.
Soon after, Kahlon made contact with Leo Group, a Chinese company that stands for” Love Each Other.” As Kahlon made his pitch during their first call, Leo was told that “it would be best not to disclose the name of SpaceX”, an executive at the Chinese company later testified. They thought that the information was extremely sensitive.
Leo quickly sent Kahlon$ 50 million. Then he sent a message to a different business associate in China saying,” Have any folks interested in spcex still?”
Kahlon claimed that he had in mind to inform Johnsen about the Leo investment and that he anticipated the CFO to approve of it. But the deal blew up after Leo mentioned SpaceX in a regulatory filing that generated widespread coverage in the Chinese business press. ( It is disputed whether Leo made the disclosure with Kahlon’s consent. )
In a panic, Kahlon enlisted a Leo vice president to try to get the articles taken down. However, when Johnsen and Tim Hughes, SpaceX’s top in-house lobbyist, saw the stories, they became alarmists.
” This is not helpful for our company as a government contractor”, the SpaceX CFO later testified regarding the press attention. It basically provides our competitors with something to use as a narrative against us.
” In my entire professional career, this was literally the worst situation that I’ve been in”, Kahlon said. ” I failed at what I believed was a fundamental responsibility in the relationship we had.”
SpaceX ultimately decided to let Kahlon buy only a smaller portion of the stake, purchasing much of the half-billion dollar investment itself. He was informed that Musk made the decision, according to contemporaneous messages and Kahlon’s testimony. However, Kahlon continued to have a strong relationship with SpaceX after the mishap, court records say, with the company allowing his firm to keep buying a large quantity of shares.
Republican lawmakers have criticized Musk’s business interests in China, which go beyond SpaceX’s ownership structure. In 2022, after Tesla opened a showroom in the Chinese region where the government runs Uyghur internment camps, then-Senator Marco Rubio tweeted,” Nationless corporations are helping the Chinese Communist Party cover up genocide”.
Nearly 40 % of Tesla’s sales were made in China last year, in addition to its expansive factory in Shanghai. The company has also secured major tax breaks and regulatory victories in the country. The Chinese premier gave Musk the country’s green card in the spring of 2019.
In recent years, the billionaire has offered sympathetic remarks about China’s desire to reclaim Taiwan and lavished praise on the government. At the conclusion of Trump’s first term, Musk said,” My experience with the government of China is that they actually are very responsive to the people.” ” In fact, possibly more responsive to the happiness of people than in the US”.
Josh Kaplan can be reached via email at joshua. kaplan@propublica .org and by Signal or WhatsApp at 734-834-9383. Justin Elliott can be reached via WhatsApp, WhatsApp, or email at justin@propublica .org. Alex Mierjeski contributed research. To receive stories like this one in your inbox, sign up for The Big Story newsletter.