In the summer of 2020, Adam Crawley, a former trader from Morgan Stanley, found himself traversing Indonesia, Thailand, and Australia, where he was honing his qigong skills with a mentor named Master YanG. Suddenly, a LinkedIn message from Noel Moldvai, a crypto enthusiast and early 2000s Canadian rock fan, drew him back into the world of finance.
Moldvai presented Crawley with a lucrative opportunity in the realm of private markets: pre-IPO shares of some of the most desirable startups globally—companies like Anthropic, SpaceX, and OpenAI—that were gearing up for massive public offerings. These shares are typically out of reach for regular retail investors, igniting a strong demand.
In February 2022, Crawley and Moldvai founded Augment, a firm based in Austin, Texas, focused on acquiring and aggregating these sought-after shares for both institutional and retail investors. Within just one year, Crawley claims that Augment’s assets have surged from below $200 million to over $1 billion, largely due to the soaring valuation of firms like Anthropic.
While trading in private shares isn’t a new phenomenon, the current AI boom is changing the landscape considerably. Tech companies are remaining private for extended periods, and venture capitalists are capturing more of the value. Unlike the old days when investing in companies like Apple at their IPO was a viable pathway to retirement wealth, the big gains now often materialize long before a company goes public.
A significant regulatory change in 2012 allowed companies with 2,000 shareholders to remain private longer, twofold increasing the number of shareholders allowed without going public. This shift has enabled companies like SpaceX and Anthropic to pursue valuations upward of $1 trillion, while leaving little room for explosive growth post-IPO.
This is where the special-purpose vehicle (SPV) comes into play, a fund designed to consolidate investments from multiple parties into a single asset. This model can include direct shares, or interests in other SPVs, all of which generate various fees at each layer. The SPV mechanism allows firms to stay private longer without revealing financial information while enabling insiders to cash out discreetly without upsetting the market.
Management fees, performance fees, and often additional charges drive the profitability of this SPV model, even as it aims to democratize access to private markets. However, the absence of robust regulatory oversight poses risks, including potential exploitation by scammers.
As interest in pre-IPO shares intensifies, a variety of stakeholders—including young entrepreneurs, ex-lawyers, mid-range VCs, and well-established financial institutions—are eagerly participating in this ecosystem. Twitter and Instagram are awash with SPV promotion, some even from unlicensed brokers. Meanwhile, traditional VCs are adopting SPVs as a strategy, as early investment rounds grow and become less accessible, often requiring significant capital.
Notable players in the SPV space include Valor Equity Partners and their holdings in SpaceX, as well as investment firms overseeing billions in assets thanks to SPVs in companies like Groq and Palantir. Other companies, such as Augment and Hiive, are also thriving, with Hiive recently valued at $650 million.
Despite the upward momentum, individual investors should approach SPVs with caution. Many will soon realize that gaining "exposure" to companies through SPVs can be pricier than owning shares outright, particularly when considering layered fees. The complexity of this fee structure can eat into potential profits significantly.
In addition to financial concerns, there's the risk that investors may not fully own the shares they believe they hold, particularly with companies like Anthropic implementing transfer restrictions. There’s also the possibility of falling victim to fraud through unregulated SPV operations, which has already resulted in legal actions against various brokers.
SPVs are drawing comparisons to SPACs, with both offering promising investment avenues but also substantial risks for retail investors. Crawley and Moldvai’s Augment began by acquiring $35 million in Anthropic shares during a fire-sale auction, funding additional acquisitions mostly from venture capital firms that are then restructured and sold through SPVs.
For venture investors, the upcoming IPOs of major tech firms will serve as a critical test of the SPV model's credibility. The market remains volatile, and complaints about excessive fees or the illegitimacy of certain SPV dealings may lead to louder calls for regulation.
Overall, the current SPV landscape is chaotic, with diverse regulations from different companies leading to potential abuses. Some proponents believe that tokenizing SPV investments could pave the way for greater flexibility, though this approach carries its own risks, especially given the tumultuous history of cryptocurrency markets.
As developments continue in this space, investors must stay informed about the implications of SPV investments and the evolving market challenges that accompany them.
