⚠️ The Pre-IPO Gold Rush Has an SPV Problem
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
Hey All,
Vieje back here feeling energized after spending last week on my first vacation without my son since he was born almost two years ago. My amazing wife gave me a week to meet a friend who was traveling to the ‘Stan countries on his sabbatical, and I spent the last week in Uzbekistan with him. It’s a gorgeous country that was once the center of all commerce during the days of the Silk Road. As a history nerd, I had an amazing time exploring and imagining myself as a Silk Road trader. It was a perfect unofficial end to summer, and I hope yours was just as good.
Now that kids are back in school and football is back, I expect activity in the private markets to pick back up again. The most notable fall event is the expected Anthropic IPO in October. If all goes according to plan, Anthropic will surpass SpaceX as the largest IPO in history just a few months after the mark was set. These blockbuster IPOs have created incredible demand for pre-IPO access, and as such, many firms have sprung up to meet that demand.
The pitch is simple: “Get in on SpaceX, Anthropic, and OpenAI before they go public.” That all sounds great, except for the fact that a meaningful number of these offerings are somewhere on the spectrum between misleading and fraud. Let’s jump in.
The WSJ reported last week that the SEC has stepped up examinations of firms behind Special Purpose Vehicles (SPVs) that offer exposure to private-company investments. As investor complaints continue to pile up, the SEC has had little choice but to scrutinize these vehicles more closely.
Before I go further, it’s worth clarifying that most SPVs are created for completely legitimate purposes. SPVs sit on pretty much every VC-backed startup's cap table. For example, an investor might fund a company through an SPV for various reasons or a company may allow a SPV on the cap table to buy shares from employees.
The issue is that as demand for access to these companies increases, these SPVs become easy vehicles to abuse. Here’s an example of how it could all spiral. A fund manager with an approved SPV that owns Anthropic shares directly may want to sell a portion of the SPV to new investors at an appreciated price and with new fees. Those new investors might then create their own SPV to invest in the first one, and then sell the interest in that new SPV. That’s called a double-layer SPV.
You can see how this gets out of control very quickly. An investor seeking access to Anthropic may invest in an entity that owns the shares, or simply just owns another entity that claims to own the shares. Multiple layers and few regulations have the SEC clamping down, especially in light of some of the public issues from the unwinding of these SpaceX SPVs after the IPO earlier this summer.
Earlier this year, I predicted that we’d see a big fallout from the SpaceX IPO when it comes to these SPVs, given that the ownership through multiple layers would be complex and result in investors receiving less than expected, if anything. The first lock-up period expired a few weeks ago, and some of these situations are starting to become public.
The WSJ’s Corrie Driebusch reports:
In November 2020, Rupireddy messaged Barish about how he had missed out on a few big IPOs recently and how he’d love to participate in buying stakes in Impossible Foods, SoFi and SpaceX. Barish said all three were available and sent over paperwork for Rupireddy to sign. Rupireddy wired over money before the end of the year, including $17,250 to take part in a fund that held shares in Elon Musk’s SpaceX, according to documents reviewed by The Wall Street Journal. At the time, he estimated the rocket maker was valued at $58 billion.
When SpaceX went public this June at a $1.77 trillion valuation, Rupireddy’s dream of a windfall seemed within reach. It’s turned into more of a nightmare.
It turned out that the fund did not actually own the SpaceX shares at IPO, but that they were sold in 2024. Based on his holdings, Rupireddy had expected a more than $300,000 windfall, but the firm had said his portion was only $45,450.
Unfortunately, it appears that Rupireddy was the victim of a multi-layered SPV that did not actually own the shares, and the remaining $45,450 was all he “bought access to” once the layers were peeled back. With multi-layered SPVs and spotty bookkeeping, tracking true ownership of the shares becomes a difficult task, and most investors have no idea that’s even a risk they’re taking on.
Unfortunately, figuring out the ownership of the shares is also just one part of the equation. There could also be many hidden fees baked in.
On August 14th, the SEC charged Andrew Spaventa and his entities with fraud. According to the complaint, Spaventa raised more than $74 million from retail investors to invest in pre-IPO companies. The issue? He used their capital to buy the shares and then sold access to those shares at heavily marked-up prices, with the markup disguised as the purchase price itself.
From the SEC press release:
The defendants falsely told investors that they would pay either no upfront fees at all or upfront fees of at most 12.5%, when in reality, the prices investors paid were on average approximately 46% higher than the prices Spaventa paid for the investments. As a result of their fraud, the defendants collected approximately $23 million in upfront fees from unsuspecting investors – of which more than $12 million was funneled to their sales agents for commissions and approximately $4 million went to Spaventa personally.
In a nutshell, he was buying the shares at $55 and selling them to retail investors at $100, pocketing the difference as a hidden fee. And while this case is a criminal one, a similiar dynamic does play out legally all the time. There are SPVs may do this legally by disclosing the difference in price in the fine print of their subscription documents in a way that most investors never read or understand.
Again, I want to emphasize that there are a lot of legitimate SPVs. There are reputable funds and companies offering SPVs that are both above board at companies, and legitimate with fair fees. I’ve personally invested in companies through them. But in any boom, there will be grifters, and at the moment, there are a lot of them. Not a week goes by that I don’t get a cold email offering me access to a hot new company.
Even when an SPV isn’t outright fraudulent, its multi-layered structure can create real complications that don't surface until after the IPO. On top of that, fees may be high enough to significantly eat into your returns.
If you are going to participate in the pre-IPO market, make sure to work with a reputable Manager/GP that you trust. Go with a firm or broker that has a real track record and structure you can understand. Make sure to verify the structure and fees.
And as always, it seems too good to be true, it probably is. Companies like SpaceX and Anthropic are not calling retail investors to invest in them. Investment funds that do have legitimate access are not either. Odds are, if a firm is calling you as a retail investor to invest in a fund that has access, it’s probably best to hang up.
Let me know what you think or if you’ve heard any crazy stories. My record for an offering of an SPV with disclosed layers in SpaceX was four. If you’ve heard any higher, I’m curious to hear!
Things we're digging: