Lawyers, insurance, and money: the business challenges of NewSpace
by Jeff Foust
|ITAR is “a narrow portal, not a wall,” Scarlott said. “It’s not necessarily the biggest issue you’re facing.”|
“It’s a monster pain in the neck,” said Randall Clague, whose duties at XCOR Aerospace include export control compliance. During a panel at the conference about export control, he described having to go around the company’s facility on a regular basis, looking for papers left out in workspaces that might have sensitive information and marking them with a stamp labeled “ITAR” as a reminder that the paper should be secured. “I feel like a babysitter. It’s just stupid.”
Kerry Scarlott, an attorney who specializes in export control law, said that, while difficult, ITAR is something that even small companies can deal with. “It’s a narrow portal, not a wall,” he said. “It’s not necessarily the biggest issue you’re facing.” However, even he acknowledged that ITAR is like “a sledgehammer hitting a fly” and that some type of reform was needed.
Some have hoped that the new Congress, now led by the Democrats, would be in a position to push for reform (see “A new hope for export control reform?” The Space Review, February 26, 2007) Conference panelists were skeptical, though, because of concerns that some Republicans will use any reform effort as a means of attacking the Democrats as being weak on national security issues. “Unless we can find a way to get some Republicans to take the lead and inoculate Democrats from any flanking maneuvers by other Republicans, I don’t see anyone taking the lead and actually trying to fix this in a serious way,” said Jim Muncy of PoliSpace.
Scarlott was similarly pessimistic of the odds of near-term reform. “There are a lot of changes potentially afoot in ITAR. I emphasize ‘potentially’ because it’s unlikely significant changes will occur in the next couple of years.”
Pat Bahn of TGV Rockets has said on a number pf past occasions, including previous Space Access conferences, “Amateurs talk propellant, professional talk insurance.” While Bahn wasn’t at this year’s conference, there were a number of professionals there talking about insurance issues facing RLV developers.
Doug Griffith, an aerospace attorney, said companies planning to fly passengers (or “spaceflight participants”, as they’re called in official FAA documents) need two kinds of insurance: liability insurance against claims made by those participants, and the third-party insurance mandated by federal law. The latter type of insurance covers the maximum probable loss (MPL) to uninvolved parties, as calculated by the FAA when issuing a permit or license. The MPL will depend on the vehicle and where it will be flying from, but will rarely be less than $3 million. That insurance tends to be available and not unduly expensive: John Carmack of Armadillo Aerospace said he obtained a policy that covers unlimited launches for one year with $3 million in coverage for $50,000.
|“State legislation is really the next great frontier for us space lawyers,” said attorney Jim Dunstan.|
The FAA, though, sets no guidelines on liability insurance for participant claims, “and that means that the liability to personal spaceflight companies from spaceflight participants is going to be governed by state law,” said Griffith. That creates a potential hodgepodge of different laws, providing varying degrees of protection against liability claims by participants and making insurance difficult and expensive to obtain.
“State legislation is really the next great frontier for us space lawyers,” said attorney Jim Dunstan. “The goal, I think, by the Personal Spaceflight Federation and many operators, is to try and pass state legislation to provide immunity for operators who complied with the federal licensing environment and obtained informed consent from spaceflight participants.”
The first state tackling that issue is Virginia. The state legislature there unanimously passed earlier this year the “Spaceflight Liability and Immunity Act”, designed to give spaceflight operators in the state immunity from liability claims. That is particularly important in Virginia, said Dunstan, because liability waivers are not valid in the state, a precedent established in state law nearly 200 years ago.
While the bill breezed through the legislature, the bill was then effectively rewritten by the Federation and lawyers like Dunstan, taking advantage of a process in the state known as the “governor’s amendment” that allows the governor to change the bill and then resubmit it to the legislature for approval. That rewrite was needed since the original bill was essentially copied from one passed last year that covered “agricultural tourism”; the original bill, for example, made mention of the “risks of injury inherent to land, equipment, and animals”. The legislature will take up the bill, along with nearly 500 others, in a one-day special session next month.
Beyond Virginia, Dunstan said there is already interest in similar legislation in Oklahoma and New Mexico, both home to commercial spaceports and spaceflight operators. California will take more time and effort, he said, because of the difficulties in passing such measures there, which effectively require amending the state’s constitution. “California is going to be a very difficult row to hoe,” he said.
One of the evergreen issues in the entrepreneurial space industry has been the difficulties such ventures have faced raising money. Unless one has a wealthy patron (such as Paul Allen’s funding the development of SpaceShipOne) or is independently wealthy (Jeff Bezos, Elon Musk, and Carmack), companies have to scrape up money, typically from individual investors rather than institutional ones.
In a reprise of a panel from last year’s conference, three investors provided their assessment of funding for companies in the industry. All of them saw evidence that it’s becoming less difficult for companies to deal with potential investors. “Every year that goes by where there are practical successes” like the X Prize Cup and space tourist visits to the International Space Station, said Joe Pistritto, “decreases the giggle factor, to the point where the giggle factor is almost gone in this industry.”
“There’s more excitement among investors,” said Esther Dyson, citing the increase in money in investment markets. “In other words, they’re more ready to be stupid.”
|“It’s getting to the point where a rational investor might soon write the first rational investor check,” said Pistritto.|
Just because there’s a lot of money and excitement out there, though, doesn’t mean that all investors, such as venture capitalists, are ready to sink money into space companies. “You’re not ready for them yet,” Stephen Fleming said, speaking specifically of VCs firms, who are looking for investments that will provide a healthy return in the short term. “One of the things they’re going to insist on is, ‘what’s your exit strategy?’… Well, guess what, there aren’t any exits in this industry yet.” Companies would do better, he said, to focus on angel investors and others with long-term horizons.
Dyson said she was concerned that the emphasis by many potential investors was on NASA. “The fitness function is always on NASA. It’s not can you build something that people want to fly in, it’s what does NASA want, what does NASA want to do… it’s kind of distressing.”
She believes companies in the field—and their potential investors—need to focus on consumer markets, like space tourism. “XCOR is now talking about the user experience, and not just the rocketship,” Dyson, an investor in the company, said. “If you’re doing anything that can talk directly to consumers, you need to start thinking about doing that both in terms of finding customers as well as finding investors. Make it something that’s attractive to people on a personal level.”
While institutional investors are not necessarily at the point where they will put their money into space ventures, Pistritto said that time is not far off. “It’s getting to the point where a rational investor might soon write the first rational investor check.”