SpaceX debuts on the Nasdaq Friday, June 12 and its $75B raise is expected to be the largest IPO on record. Elon’s rocket company stayed private much longer than most high-growth tech companies, while its valuation went the way of most of its rockets – up, up, up. With demand for Space X shares cruising much higher than the actual shares for sale – a fire hose of Special Purpose Vehicles (SPVs) has been gushing for the last several years. Let’s talk about what those are and what you need to know before you write the check.
What is an SPV?
An SPV is a legally separate standalone company created for a single specific business objective. Historically, they have offered institutional funds, high-net-worth individuals, and everyday accredited investors a way to buy into a private company before its initial public offering. Because direct investment in SpaceX was restricted to a limited number of select insiders (such as employees and established venture capital firms), specialized syndicate managers created SPVs to pool capital from smaller investors and purchase blocks of shares.
Why SPVs Can Get Complicated
It sounds simple enough, but SPVs can have difficulties. The shares in the target company already exist, and they are eventually transferred to this new legal entity. Perhaps there are even blockchain-based tokens created to reference the SPV shares (importantly, these are usually not the underlying shares). In the frenzy around generational companies such SpaceX, we’ve seen a lot of widespread investor interest and a lot of layering.
As a result of this layering, many investors are now confused about their holdings, the additional fee structures they have to pay, and whether they face lock-up restrictions when the underlying stock goes public. There are also fraud concerns – what do they really own? The massive hype surrounding SpaceX’s IPO has unfortunately attracted the inevitable bad actors and scams. Investor fear regarding whether some SPV shares are genuine is legitimate. Here are the questions you need to ask when navigating SPVs.
What Exactly Are You Getting for Your Investment in an SPV?
With regards to an SPV, you need to understand what you are buying. Know the answer to questions such as what is the provenance and health of that thing you’re buying. Whether it’s shares of stock, or a cow, or a rug – you need to know what it is. If you hand over money, what do you get, and what’s the quality of the thing that you get back?
Do You Really Have an Investment in the Target Company?
Beware of transacting in shares that aren’t directly registered with the targeted company’s shareholding. If you are not on the shareholder registry, then you do not actually have an investment in that company. Anyone making a significant investment should get legal counsel. They should review the documents and kick the tires. I’ve seen this throughout my career There’s a tendency to write checks and think these are “form documents,” everybody’s doing it, they’re non-negotiable – “I’ll just write the check and worry about it later.” Do your homework, or hire someone to do your homework for you. Read the fine print. You’ve got to understand how the pieces of the puzzle fit together.
Where is your License?
Another issue to consider is whether the people offering these SPV opportunities have financial licenses. I’ve noticed that many of those offering indirect SPV structures tend not to be licensed. It’s a huge red flag. They’re not selling you a boat or a baseball card – they’re selling you a financial instrument – shouldn’t they be licensed? As soon as he or she finishes giving their sales pitch and telling you what a phenomenal opportunity this investment is, your immediate reaction should be, “Where are you licensed? What are your regulatory permissions? What filings do you make?” The shares of any of these headline-grabbing companies are securities. The shares of any of these SPVs are securities. Offering them to investors means you’re involved in arranging transactions in securities or issuing derivatives in reference to securities. Where is your license?
Too often, investors in these SPVs think they’ve done everything right from a financial commercial calculation. But at the end of the day, if the underlying company doesn’t respect the transfer, then the counterparty that you transacted with doesn’t actually have the assets they promised you.
In that case, get ready to write another check – to your lawyer. You’re going to have to sue.
