Private company share trading seems to be the theme of the week.  The WSJ reported on it Tuesday, and on Wednesday, Mike Levin and I posted a new episode of Shareholder Primacy – where we talk about “withhold the vote” and “vote no” campaigns for corporate directors – but we also talk about the phenomenon of private company share trading.  (Here on Apple, here on Spotify, here on YouTube). 

The WSJ focuses on how accredited investors – which is a relatively low bar, for individuals, it just means someone who earns $200K per year, or has $1 million net worth (minus the primary residence) – are increasingly able to trade shares of pre-IPO companies on sites like EquityZen and Forge Global.

But the WSJ only glancingly references the point that Mike and I focused on in the podcast: The investors aren’t trading shares of the operating company; they’re trading shares of SPVs, which themselves own shares of the operating company.  This is something I posted about before, here – it’s a way to avoid the securities law requirement that companies begin public reporting if they have 2,000 investors holding a single class of equity.

Except, under the securities laws, the operating company is not supposed to be involved in creating the SPV – a detail that companies seem to be ignoring.

The phenomenon allows companies to stay private longer – they can raise all the capital they need, and get liquidity to boot, through the use of SPVs – but also herds a lot of only moderately wealthy investors into opaque funding vehicles, that may charge hefty fees, that give them no insight into the operating company and no rights associated with it (like, fiduciary claims, inspection rights, etc).

For example, here are the offering documents that StartEngine posted for investment in a StartEngine SPV that will invest in Kraken. As I understand it, in addition to a 20% carry, the SPV will purchase the Kraken securities from one of its affiliates at a price that is approximately 45% higher than the price the affiliate paid.

Which brings me to CoreWeave.  It was generally viewed as a hot AI startup until it filed for its IPO – at which point, the public got a look at its financials and recoiled (very much like WeWork, in that respect). The IPO is supposed to happen today; I guess we’ll see how it trades, but it’s already been scaled back.

One argument is that CoreWeave is disappointing precisely because it needed the IPO – public companies are where you go when you aren’t good enough to be hoarded in private markets. But that situation is unsustainable because, as Elisabeth de Fontenay pointed out several years ago, private market investors rely on the information supplied in public markets in order to value their companies.  Without a robust public market, everyone’s flying blind.

These are the kind of dangers that we’re exposing moderately wealthy retail investors to, with a healthy dose of SPV fees to boot. 

And another thing. Belated plug for the Shareholder Primacy podcast released last week, where Mike Levin spoke to Sarah Haan at Washington & Lee about the connections between shareholder democracy and civic democracy.  Here at Apple, here at Spotify, and here at YouTube.