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Elon Musk’s neurotechnology unicorn may have misled the SEC: Here’s how that could get ugly

February 4, 2022, 4:40 PM UTC

Looks like Elon Musk could soon find himself in hot water with the Securities and Exchange Commission… again. 

This time it could be over whether Neuralink, his neurotechnology unicorn that seeks to put a chip in peoples’ brains and help people with paralysis, misled the SEC over Musk’s involvement in running the operation.

Let’s backtrack to 2018 for a moment, and lay all this out. In August of that year, Musk tweeted that he was contemplating taking Tesla private and that he had the “funding secured” for the deal. As we all know, that prompted an SEC lawsuit over misleading investors, and it ultimately ended in a settlement, where Musk had to step back as chairman for a few years, pay a $20 million fine, and have his communications vetted by Tesla.

That, naturally, was a setback for Musk individually, as well as Tesla as a company. But it spelled a particular kind of trouble for Musk’s private companies, like Neuralink, that are still raising capital from investors in the private markets. 

Startups have the benefit of using a legal exemption where, pending certain requirements, they don’t have to register a private share sale with the SEC. But if, for instance, the company is affiliated with a so-called “bad actor,” meaning a top executive or major investor who has been convicted of a crime or engaged in securities-related misconduct, it wouldn’t qualify for that exemption.

“In the case of Musk, his settlement with the SEC meant that he was considered a ‘bad actor,’ and Neuralink was going to lose its exemption from having to register any private placement with the SEC unless it got a waiver from the agency,” Jeremy Kahn, my Fortune colleague who broke the story this morning, tells me.

The day after the SEC settled its lawsuit against Musk, Neuralink’s attorneys requested a waiver from the federal regulator, asking that Neuralink still be permitted to sell shares without registering the sale with the SEC. Musk “has no executive or management role at Neuralink,” attorney Roel Campos, who is notably an ex-SEC commissioner, wrote. He added that “Mr. Musk does not serve as an officer or director of Neuralink.” The SEC granted that waiver.

Here’s the problem: Half a dozen ex-Neuralink employees told Kahn that Musk frequently referred to himself as CEO of the company. He was allegedly the one with the final say for the major strategic and product decisions, they said. In the company’s Form D for its most recent funding round, Neuralink listed Musk as “executive officer.” 

What does all that mean? We can’t be 100% sure. The SEC wouldn’t comment, and neither would Neuralink or Campos. But securities lawyers told Kahn there’s a good chance that the September 2021 letter was misleading.

I asked Kahn what this all means—should Neuralink have, indeed, misled the SEC about Musk’s role in running the company.

“If the SEC feels that Neuralink did mislead them in its request for a waiver, it could have potentially serious consequences for both Neuralink and maybe Musk too,” Kahn wrote me via email from London this morning. “It’s possible the SEC will rescind the waiver it granted Neuralink in 2018, which would make it much more difficult and expensive for Neuralink to raise further venture capital funding in the future. The SEC could also decide that providing this misleading information was illegal, resulting in fines and even potential prison time for those involved if they were to be convicted. More broadly, it is also possible the SEC will want to revisit the Tesla settlement with Musk, and it could revoke that too if they felt this fit a pattern of Musk continuing to play fast-and-loose with the truth in his communication with both investors and the SEC itself.”

To be sure, the SEC may have looked at factors other than Musk’s involvement in the company, before making its decision to grant Neuralink’s waiver in October 2018. One of those key factors is that Neuralink is a separate entity from Tesla, in a completely different industry.

It’s a tough position for Neuralink. Its ties with Musk could wind up making it harder to raise capital. On the other hand, Musk’s involvement is precisely what has attracted $363 million (per Pitchbook) to the company so far. Musk draws attention wherever he goes—and he’s done exactly that for brain-computing, igniting interest (and millions of dollars in capital) in a complicated sector that might feel sleepy to those on the outskirts and is years or decades away from being a viable business.

Before I leave you, it’s worth pointing out some of the other reporting both Kahn and Fortune tech reporter Jonathan Vanian have done, which was featured in our latest magazine issue. Interviews with former Neuralink employees reveal dysfunctional management and turmoil at the startup. Only two of Musk’s eight co-founders remain at the company, and Neuralink’s former president, Max Hodak, left last year. Employees describe a culture of relentless pressure to meet timelines that were unrealistic. Then, there’s the matter of whether Musk has altogether exaggerated what Neuralink technology is capable of, and whether his promises are simply too grandiose.

I asked Kahn what his reporting means for investors that are likely “very familiar with all of Musk’s strengths and foibles,” as he puts it.

“Investing in one of Musk’s companies carries risks,” Kahn tells me. “And one of those risks is that at some point, the company is going to get into hot water with the SEC.” 

By the way, you probably want to hear more from Jeremy. You can get his and Jonathan Vanian’s reporting in your inbox every Tuesday with Eye on A.I., their newsletter which covers the latest, most innovative developments and trends in artificial intelligence. Catch up on their recent coverage, and subscribe here.

Until Monday,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com

VENTURE DEALS

- Trust Machines, a remote Bitcoin app ecosystem, launched and raised $150 million from investors including Breyer Capital, Digital Currency Group, GoldenTree, Hivemind, and Union Square Ventures.

- ConcertoCare, a New York-based care provider of at-home care for seniors and other adults, raised $105 million in Series B funding led by Wells Fargo Strategic Capital and was joined by investors including Obvious Ventures, Vast Ventures,The Schusterman Family Foundation, SteelSky Ventures, Pennington Partners, and Deerfield Management

- Pixel Vault, a New York-based NFT project developer, raised $100 million in funding from investors including Adam Bain, 01 Advisors, and Velvet Sea Ventures.

- Future, a San Francisco-based digital fitness coaching app, raised $75 million in Series C funding. SC.Holdings and Trustbridge Partners led the round and were joined by investors including Kleiner Perkins, Fabletics co-founder Kate Hudson, actor and podcast host Oliver Hudson, pro bowler J.J. Watt, and others.

- Celestial.ai, a Sunnyvale, Calif.-based AI accelerator company, raises $56 million in Series A funding led by Koch Disruptive Technologies and was joined by Temasek’s Xora Innovation Fund, The Engine, Tyche Partners, M-Ventures, IMEC XPand, and Fitz Gate.

- Novi Connect, a Larkspur, Calif.-based B2B marketplace for sustainable ingredients and packaging, raised $40 million in funding. Tiger Global led the round and was joined by investors including Defy.vc and Greylock

- Flip, a Stuttgart, Germany-based workforce internal communications app, raised $30 million in Series A funding. Notion Capital and HV Capital co-led the round and were joined by investors including former Volkswagen CEO Matthias Müller and former BASF CEO Jürgen Hambrecht.

- Wrk Technologies, a Montreal-based automation startup, raised $23.5 million in Series A funding led by White Star Capital and OMERS Ventures

- Koya Medical, an Oakland, Calif.-based wearable therapeutic device company for lymphatic and venous care, raised $26 million in Series B funding led by 3x5 Partners and was joined by investors including Asahi Kasei Ventures, Cadence Ventures, Arboretum Ventures, and Scientific Health Development.

- Countable, a San Francisco-based community management SaaS platform, raised $13.5 million in Series A funding led by Canaan Partners and was joined by investors including Mighty Capital, Global Catalyst Partners, and Ulysses Management.

- Yardstik, a Minneapolis, Minn.-based screening, verification and training solution company for gig marketplaces and SaaS platforms, raised $8 million in Series A funding led by Grotech Ventures and was joined by investors including Rally Ventures.

- C the Signs, a London-based AI-driven cancer detection platform, raised £5 million ($6.8 million) in Series A funding led by MMC Ventures

- Cynomi, a London-based Virtual CISO Platform for service providers and SMBs, raised $3.5 million in seed funding from investors including Flint Capital, SeedIL, and Lytical Ventures.

- Flexio, a Mexico City-based B2B payments platform, raised $3 million in seed funding led by Costanoa Ventures and was joined by investors including Soma Capital, Latitud Fund, Omri Mor, Daniel Kahn, Diego Oppenheimer, and others.

- inspace, a Boston-based solution for booking workplaces, raised $2.5 million in funding. Fort Ross Ventures led the round and was joined by investors including Flyer One Ventures, Softline Venture Partners, Joint Journey, Storied Ventures, and Mynd co-founders Doug Brien and Colin Wiel

- Pay Theory, a Cincinnati-based payments platform, raised $2 million in seed funding led by Zeal Capital Partners.

PRIVATE EQUITY

- Level Equity invested $50 million in PURE Property Management, a Los Gatos, Calif.-based residential property management and technology company.

- Auxo Investment Partners acquired Securit Metal Products, a Dowagiac, Mich.-based solid and semi-tubular rivets manufacturer. Financial terms were not disclosed.

- Arctic Wolf, backed by Viking Global Investors and Owl Rock Capital Group, acquired Tetra Defense, a Madison, Wis.-based cyber risk management platform. Financial terms were not disclosed.

- Picsart, backed by SoftBank, acquired Code Republic, a Yerevan, Armenia-based programming research center operator. Financial terms were not disclosed.

EXITS

 - Inland Pipe Rehabilitation, a J.F. Lehman & Company portfolio company, agreed to acquire Inliner, a Watsonville, Calif.-based trenchless pipe rehabilitation solutions provider for addressing wastewater and stormwater infrastructure, from Granite Construction Incorporated for $159.7 million. 

OTHER

- Brightcove acquired Wicket Labs, a Seattle, Wash.-based audience insights platform. Financial terms were not disclosed.

- Bauer Media Audio agreed to acquire Media Capital Rádios, a Portugal-based radio company, from Media Capital Group. Financial terms were not disclosed.

FUNDS + FUNDS OF FUNDS

- NGP Capital, a Palo Alto, Calif.-based venture capital firm, raised $400 million from Nokia for its fifth fund focused on growth stage companies developing emerging 5G use cases.

- ACME Capital, a San Francisco-based venture capital firm, raised $300 million for its fourth fund focused on early-stage companies.

- Artisanal Ventures, a San Francisco-based venture capital firm focusing on B2B cloud services, raised $62 million for its first fund.

PEOPLE

- Eight Roads Europe, a London-based venture capital firm, promoted Alston Zecha and Vytautas Balsys to partners.

- The Engine, a Cambridge, Mass.-based venture capital firm, hired Milo Werner as general partner. Formerly, she was with Khosla Ventures.

- Initialized Capital Management, a San Francisco-based venture capital firm, hired Abdul Ly as principal. Formerly, he was with First Round Capital and Index Ventures.

- Manna Tree, a Vail, Colo.-based investment fund, promoted Adriana Tullman to managing director of global investment solutions.

- Tikehau Capital, a Paris-based alternative asset manager, hired Alexander Bell as head of the North American private equity climate practice and Cristian Norambuena as director of the practice. Formerly, they were with Caisse de Dépôt et Placement du Québec and the New York City Comptroller’s Office, respectively.

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