Op-ed | Is public capital ready to help fuel the private space economy?
For the first time in decades, the space industry is proving to be very popular again. With the recent successes of SpaceX’s crewed missions, the upcoming landing NASA’s Mars 2020 rover, Japan’s returned sample from the asteroid Ryugu, China’s lunar landing, and the test flights of Elon Musk’s Starship, public sentiment is becoming extremely positive again and enthusiasm seems to be nearing Apollo-era heights.
Beyond public sentiment, the investment community is also showing a keen interest in space companies. A great example is the special purpose acquisition company (SPAC) listing of Virgin Galactic which saw it become one of the most active public stocks of 2020. This year will see even more listings through initial public offerings (IPOs), SPACs and direct listings, which may include companies such as Momentus and Voyager Space Holdings. Investing in early stage companies will also be a source of excitement for the public as startups continue to seek capital from new investors and become more well known.
Startups that plan to raise capital from the public under the U.S. Securities and Exchange Commission’s (SEC) newly amended Jumpstart Our Business Startup (JOBS) Act, may do better now than when the rules were implemented in 2013. For example, space-related companies could initially only raise $1.07 million a year under the original rules, but in December 2020, the SEC voted for the limit to be increased to $5 million a year. At the same time, they allowed the use of traditional special purpose vehicles (SPV) to make these capital rounds more compatible with follow-on institutional raises. These rule changes come at an important time and could help provide the capital fuel for a growing private space economy that may see a banner year in 2021.
Last month, the SEC proposed amendments to the JOBS Act scheduled to go into effect in March. The original rules laid the groundwork for companies to sell shares of new businesses to individual investors, through public internet solicited campaigns. Under the original Securities Act of 1933, the SEC prohibited companies to sell shares to the public unless they were registered with the SEC and followed strict guidelines. The SEC eventually created an exemption framework, that if a company qualified, could offer shares for sale without registering.
The common exemption used by most institutional investors, including venture capitalists, is Regulation D (Reg D). Raising capital under Reg D limits the issuing company to sell shares mainly to accredited investors, which eliminates a vast majority of the public. While this may not seem fair, ironically it was one of the main intentions of the 1933 Securities Act; protect the general public. The JOBS Act is meant to bring the public into the private company investment process in a balanced manner and allow them to be exposed to the risks and rewards of early stage companies.
This brings us to the details of new amendments, which provide changes to two exemptions that include Regulation CF and Regulation A (colloquially referred to as Reg A+). Both regulations allow the public to be solicited by Financial Industry Regulatory Authority (FINRA) members and SEC regulated platforms and sold shares of private companies. Under Reg CF, an issuing company can now raise up to $5 million a year, use an SPV to aggregate large numbers of investors, and finally to conduct early campaign trials, called testing-the-waters, to gauge public interest in potential company listings. Under Reg A, an issuing company has a choice of two tiers; under Tier I it can raise up to $20 million and under Tier II it can now raise up to $75 million, up from $50 million. Companies have additional financial disclosure requirements to adhere to under Reg A raises compared to Reg CF.
Space-related companies that have raised under the JOBS Act prior to the new amendments have had varying results. Companies like Tesseract, a California propulsion company, were able to quickly raise the maximum amount under Reg CF in 2018. Solstar, a New Mexico space networking company, is seeing similar success and will likely reach its maximum capital raise easily. Although these two companies were able to raise capital efficiently, other companies struggled. Overall, very few space companies adopted this funding method under the original rules.
Many proponents of the JOBS Act and raising capital on public platforms, have expressed that the new amendments will help accelerate the adoption rate of the new capital source and possibly create the proverbial “hockey stick” effect. Although I believe that these amendments are very important to space companies, they will not solve all their challenges. For instance, increasing the raise limit to $5 million will certainly help within a capital intensive industry like space. Also allowing the use of SPVs to aggregate large numbers of retail investors, simplifies the capitalization table for follow-on institutional investors.
Despite all this, you still need a market.
Creating a large market for space investors with these structural improvements, is crucial to the larger adoption of this capital source. It’s logical to think that a large market is possible based on a large population of both altruistic-driven and financially-driven space enthusiasts. Based on social and traditional media activities, some believe this population could be as large as 25 to 50 million potential investors.
Capital raised through the JOBS Act has also been met with a certain amount of criticism by some venture capitalists (VC) and private equity (PE) firms. It’s sometimes referred to as ‘not-smart’ or ‘messy’ money. The original rules created deal structures that were not standard for institutional investors and were deemed incompatible, creating challenges in follow-on raises for issuing companies. But some of this criticism may have been partly defensive. My own experience with established space VCs and PEs however, has been starkly different — the JOBS Act has been encouraged and supported and will potentially act as a preprocessor to their investing methods.
There have been other platform improvements in the areas of technology and process, as well. These include cloud-native technology that scales to handle massive amounts of users and transactions, conducting anti-money laundering (AML), know your customer (KYC), payments efficiency, and data and analytics. All these contribute to improving customer experience while increasing gross margins. Even the application of distributed ledger technology (DLT) and smart contracts have added value by future-proofing architectures for potential secondary markets with powerful automated asset servicing.
The amendments and improvements will help startups raise capital on these platforms much more efficiently. But the biggest improvement will come when a platform creates a specific market for space investors. To create and maintain this market one needs to know the target audience, understand how to reach them through paid and organic marketing, bring them to the platform and get them to stay and make multiple investments — not the “churn-and-burn” approach of some others.
Creating a sustainable market that retains members and forms capital in an exponential manner requires engaging them on many aspects of the industry and investing in general. It requires educating market participants on topics like portfolio theory and providing them with relevant market intelligence and insights specific to the industry to help create a fruitful, sustainable capital ecosystem.
The real tipping point for public capital to help fund the private space economy is when a true market is created specifically for private space investments. A market where a large number of space investors come to find quality private companies, similar to what happened when the NASDAQ evolved into a market that attracted both tech companies and tech investors during the early days of Silicon Valley. The urge for exploration and human curiosity combined with an enthusiasm for space, I believe, will create that large market of public space investors and will help provide the capital fuel for an innovative and growing private space industry.
J. Brant Arseneau is a founding partner of 9Point8 Capital, founder of Spaced Ventures and board member and chairman of the Space Infrastructure Bank Committee for the Foundation for the Future.
This article originally appeared in the Jan. 18, 2021 issue of SpaceNews magazine.