How America’s Wealthiest Access Billions Without Selling Stock

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For most of us, borrowing money means securing a loan against assets like a home, car, or other valuables. However, the ultra-rich play by a different set of rules. Instead of selling stock and incurring capital gains taxes, America’s wealthiest often pledge their shares in public companies as collateral for loans, granting them access to immense capital without relinquishing ownership or control.

What Is Share Pledging?

Share pledging allows individuals to use their stake in a public company as collateral to secure lines of credit. This debt can be used for various purposes, including purchasing real estate, investing in other ventures, or even buying more of the same company’s stock. The benefits of this practice are twofold:

1. Preservation of Ownership and Control: Billionaires retain their voting rights and influence in the company.

2. Tax Efficiency: By not selling shares, they avoid hefty capital gains taxes.

This practice has gained traction among the ultra-wealthy, with 560 executives, directors, and significant shareholders currently pledging shares, according to public disclosures required by the SEC since 2006.

High-Profile Examples: Elon Musk and Larry Ellison

Among the most prominent share pledgers is Tesla CEO Elon Musk, but Oracle co-founder Larry Ellison provides an equally fascinating case study. With a net worth exceeding $100 billion, Ellison has been leveraging his Oracle shares for over two decades to fund massive investments, including a $300 million splurge on the Hawaiian island of Lanai. While Oracle’s board banned share pledging in 2018, Ellison was the sole individual exempted from the rule.

This financial maneuvering enables billionaires to fund personal ventures while maintaining control over their companies, a privilege not accessible to the average investor.

The Risks of Pledging Shares

While share pledging offers many advantages, it’s not without risks. One of the biggest dangers is a margin call. If the stock price of the pledged shares falls significantly, lenders may demand additional collateral. If the borrower cannot provide it, they may be forced to sell shares, triggering a chain reaction:

1. Downward Pressure on Stock Price: The sale of large blocks of shares can depress the company’s stock price further.

2. Investor Anxiety: Shareholders may lose confidence, exacerbating volatility.

These risks highlight why many large companies—over two-thirds of S&P 500 firms—prohibit or restrict share pledging. Critics argue that pledging can misalign incentives between executives and shareholders, as it allows executives to diversify their wealth through debt-financed investments, reducing their direct economic interest in the company’s performance.

Defenders of the Practice

Despite its risks, proponents of share pledging argue that it aligns executive and shareholder interests. Tesla, for instance, has claimed that pledging allows executives to access liquidity without relying on high cash compensation or selling shares, keeping their long-term incentives aligned with the company’s performance.

A Murky World

Although public disclosures shed some light on share pledging, much remains hidden. For instance, private stakes or diversified securities used as collateral are not subject to the same transparency requirements. This opacity leaves a significant portion of billionaire borrowing practices unexamined.

Conclusion

Share pledging underscores the financial ingenuity of the ultra-wealthy. By leveraging their stakes in public companies, billionaires can access billions in liquidity while preserving ownership and avoiding taxes. However, the practice remains a contentious issue, balancing the benefits of financial flexibility against the risks of misaligned incentives and market volatility.

As corporate governance evolves, so will the scrutiny on this opaque yet powerful tool that allows America’s richest to borrow billions without selling a single share.