Why This SpaceX-Focused ETF Is Pushing the SEC’s Limits

The sky’s the limit … at least, according to ERShares.

Investors piled into the Private-Public Crossover ETF (XOVR) before a major funding round in December that boosted SpaceX’s valuation, betting that the fund’s SpaceX stake would jump in value. Once the aerospace company was valued at $1 trillion in February, however, many of those investors quickly pulled their money back out, shrinking the fund back down to its original size. This left the fund with 44% of its assets in SpaceX, nearly triple what the Securities and Exchange Commission allows. Some experts have argued that the company is disregarding liquidity rules, which they say could pose dangers to average investors.

“ERShares views our SpaceX position as gold,” said ERShares CEO Joel Shulman. “In fact, I like it better than gold.” When the ETF had large inflows starting in December, he said, its SpaceX position was diluted to less than 2%, so the firm bought more in order to meet shareholders’ expectations. “We didn’t know at the time that this money might depart.”

In-N-Out Fund

There have been other instances of investors buying up shares of products ahead of lucrative IPOs. Last year, for example, investors leapt into the ARK Innovation ETF (ARKK) after an SEC report highlighted Cathie Wood’s plan to buy millions of dollars’ worth of shares in the initial public offering of Bullish, a crypto exchange. The fund quickly lost just as much, however, dropping more than $5 billion in assets in less than a week. Such boundary-pushing could have consequences, since so much of XOVR’s holdings now consist of a single entity. 

While Shulman doesn’t think investors will have trouble redeeming their shares, other industry experts disagreed. “Apparently ‘counting on lack of enforcement’ is now a business strategy,” Dave Nadig, president and director of research at ETF.com, wrote on LinkedIn. “If having almost half your ETF in a security that is not listed and does not trade is ‘playing by the rules’ … and the SEC is just telling them, ‘We understand,’ then we truly live in an absolutely lawless market.” 

According to a Financial Times report:

• After investors pulled more than $600 million out of XOVR, its assets decreased to $482 million.
• The fund was launched in 2017 and now has roughly $1.5 million in AUM.

You Say Less Liquid, I Say Illiquid. In the past, regulators have taken a strict view on SpaceX’s categorization as an illiquid asset, rather than “less liquid,” since the latter type of asset doesn’t have a percentage limit, as opposed to a 15% cap on illiquid assets. But the current SEC’s regulatory stance has been seen as more relaxed. “It was obvious that we were going to have deregulation, and that’s what we got,” said Bill Singer, a veteran Wall Street regulatory lawyer. “I don’t know why that surprises anybody.”