SpaceX will make its public debut on Friday, yet some investors who backed the company through special purpose vehicles (SPVs) still do not know how many shares they are entitled to or if they will receive any shares at all. Investing through SPVs, where multiple parties pool their money to invest in a single company, has been around for some time. However, SpaceX represents an unprecedented case of an IPO with multiple layers of these vehicles. Due to high demand for SpaceX allocations in recent years, SPV investors have occasionally formed new SPVs from their shares, creating structures that are sometimes stacked four or five layers deep. SpaceX will be the first major test of the legitimacy of multi-layer SPVs. In recent months, both Anthropic and Anduril have announced that they are disallowing such structures. Nearly a dozen SPV managers and secondary market investors who spoke to TechCrunch indicated that backers in lower-tier vehicles might find they own fewer shares than expected or, in rare cases, may not receive any shares at all. In most situations, these investors wonât learn how many SpaceX shares they actually own until the companyâs rolling lock-ups, scheduled to take place over about four months, begin to lift. This is because SPV managers wonât begin distributing shares to investors in these vehicles until they gain access to the shares themselves, sources told TechCrunch. Lock-up agreements prevent insidersâincluding employees, their friends and family, and venture investorsâfrom selling shares for a set period after an IPO to prevent excessive selling pressure on the stock. The first-layer SPV will have 30 days to distribute stock to its investors, said Justin Ernest, founder and managing partner of Sabertooth Capital, a firm that invests primarily in first-layer SPVs. Consequently, the next layer down likely wonât receive its shares for as long as 30 days, meaning the vehicle below that must wait even longer to deliver stock to its own backers. For the final disbursement, the bottom SPV layer may have to wait eight or nine months, Ernest estimates. A secondary investor, who asked to remain anonymous, told TechCrunch that some investors in âmessyâ multi-layered SPVs will be surprised to learn that some of the shares they expect to get will be âeroded by feesâ pocketed by the SPV. Ideally, the SPV manager communicates with the investors in their vehicle from the IPO date on. âThe problem is you have a communication train with each person only knowing whatâs going on in the layer above them,â the secondary investor said. In short, the structural ownership of these vehicles has become so highly convoluted that even the best-intentioned SPV sponsors may end up inadvertently misleading their investors. The biggest concern for downstream SPV investors is that they may not get any shares in SpaceX. Giovanni Pennetta, the manager of Sestante Capital, was recently sentenced to four years in prison for fabricating access to non-existent allocations in the defense tech company Anduril. The fear, of course, is that Pennetta is not the only deceptive sponsor out there. Investors at the bottom of these structures essentially had to confirm that every single manager above them was legitimate. Given the messy structures of these deals, itâs likely some buyers didnât vet the entire chain. âA friend just shared in confidenceâthey bought SpaceX through a 2-layer SPV in 2021. The returns are supposed to be worth any fees; the only problem is the SPV manager stopped responding to emails or calls,â Nick Davidov, founder of venture firm Davidovs Venture Collective, posted on X last month. He wrote that the investor hasnât heard from the SPV manager for a year. Idan Miller, managing partner at the secondary market Unicorns Exchange, is convinced that a few other bad actors will be revealed once lock-ups expire. âOnce the lock-up of the shares is removed, and these SPVs start selling the shares, there will be some vehicles that will be revealed as scammers or fraud,â Miller told TechCrunch.
Blogger's Review: This article highlights the complexity and potential risks associated with multi-layer SPV structures in the SpaceX IPO. Investors need to remain vigilant when participating in such investments, especially in the absence of transparency, as they may face risks of shares being eroded or not receiving shares at all. In the future, regulatory bodies may need to enhance oversight of such investment structures to protect investor rights.