In the summer of 2020, former Morgan Stanley trader Adam Crawley was wandering through Indonesia, Thailand and Australia, perfecting his qigong with a man called Master YanG, when a cold message on LinkedIn jerked him back to reality.

The sender was Noel Moldvai, a crypto enthusiast with a fondness for early-2000s Canadian rock and a pitch about the hottest corner of the private markets.

Crawley had no intention of going back into finance, but Moldvai sold him on a market in which access was scarce and demand was feral: pre-IPO shares in the largest and hottest startups on the planet. The ones planning trillion-dollar public offerings: Anthropic, SpaceX and OpenAI. The kinds of shares almost no retail investor is supposed to be able to buy. The kind everyone wants.

In February 2022, the pair founded Austin, Texas–based Augment, a firm built to locate and package those shares for sale to institutional and retail investors who couldn’t otherwise buy them. Crawley claims Augment’s assets—almost entirely pre-IPO shares in private tech companies—­­­­­have ballooned from under $200 million to more than $1 billion over the last 12 months, driven largely by Anthropic’s skyrocketing value.

Augment isn’t charting a new path here. People have been trading private-company paper since well before Facebook’s 2012 IPO. But the AI boom seems to be turning the side door into more of a front entrance. The reason is simple: Hot tech companies are staying private longer and VCs are pocketing much more of the value. Buying Apple at its IPO price and waiting a few decades was once a viable retirement plan. Buying a $1 trillion company at IPO and waiting for it to triple is not. The biggest gains now happen years before the prospectus is filed.

One reason: The SEC changed the rules back in 2012. Before then, companies with $10 million in assets or 500 shareholders had to go public (that’s partly why Facebook did so); now the limit is 2,000 shareholders. SpaceX, Anthropic and OpenAI are all hoping to go public at valuations of $1 trillion or more, leaving little room for further exponential growth.

Enter the special-purpose vehicle, or SPV: a fund built to pool money from many parties into a single asset. Sometimes the asset is the shares. Sometimes it is an interest in another SPV that holds the shares. Sometimes it is an interest in an SPV that holds an interest in a third SPV that holds the shares. Each layer is its own legal entity. And each layer charges fees.

The SPV is a regulatory workaround that helps companies stay private longer without disclosing any financials, because hundreds of people can aggregate their shareholding into a single vehicle on the cap table. And, importantly, the SPV marketplace allows for company insiders—including their billionaire founders—to cash out secretly without spooking the market.

Everyone along the way takes a cut: There are management fees, carried interest and sometimes access or introduction fees. Fueled by FOMO and the fact that private stock can be difficult to transfer, the SPV ecosystem has become a booming toll-road business for the companies and brokers that run it. Sim Desai, CEO of the SPV brokerage Hiive, estimates that SPVs hold “hundreds of billions” in private venture-backed companies.

It’s a major step toward a worthy goal: democratizing private-company ownership. The more people can share in private markets’ gargantuan economic gains, the better. But without consistent rules and active regulators, the market for pre-IPO shares risks turning into a playground for scammers.

Everyone is trying to get a piece of the market. That includes 20-something-year-old foun­ders, former lawyers, mid-tier VCs and venerable institutions like Morgan Stanley and Charles Schwab, which peddle SPV investments to high-net-worth clients. There are even SPV shills on Instagram, WhatsApp and Telegram.

On one end, there’s a shadow network of individual brokers, some of whom may be unlicensed. On the other, there are “traditional” venture capitalists using SPVs as an investment strategy. Early-stage rounds are getting larger and less accessible to anyone without deep pockets. Later-stage rounds are being sliced into deals where investors can pick the single company they want and pay........

© Forbes