SpaceX IPO exposes hidden risks for SPV investors: Shares may be delayed or lost

SpaceX is set to make its public debut on Friday, but a significant number of investors who backed the company through special purpose vehicles (SPVs) still do not know how many shares they are entitled to — or whether they will receive any shares at all. This unprecedented situation stems from the complex, multi-layered SPV structures that have formed around SpaceX, creating a web of uncertainty that could take months to unravel.

How multi-layer SPVs create uncertainty

Investing through SPVs, where multiple parties pool their money to invest in a single company, is a well-established practice. However, SpaceX represents an extreme case, with some SPVs stacked four or five layers deep. This occurred because demand for SpaceX allocations was so high in recent years that investors in one SPV sometimes formed a new SPV from their shares, creating a cascading structure. SpaceX will be the first major test of the legitimacy of these multi-layer SPVs, especially after companies like Anthropic and Anduril announced they are disallowing such structures.

Nearly a dozen SPV managers and secondary market investors who spoke to Bitcoin World said that backers in lower-tier vehicles may find they own fewer shares than they think — or, in rare cases, that they may not receive any shares at all. In most situations, these investors will not learn their actual holdings until the company’s rolling lock-ups, scheduled over about four months, begin to lift. That is because SPV managers will not start distributing shares to their investors until they gain access to the shares themselves.

Lock-up delays and fee erosion

Lock-up agreements prevent insiders — including employees, their friends and family, and venture investors — from selling shares for a set period after an IPO to prevent excessive selling pressure. The first-layer SPV will have 30 days to distribute stock to its investors, according to Justin Ernest, founder and managing partner of Sabertooth Capital, a firm that invests primarily in first-layer SPVs. Consequently, the next layer down likely will not receive its shares for up to 30 days, meaning the vehicle below that must wait even longer. 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 Bitcoin World that some investors in “messy” multi-layered SPVs will be surprised to learn that some of the shares they expect will be “eroded by fees” pocketed by the SPV manager. Ideally, the SPV manager communicates with investors from the IPO date onward. “Problem is you have a communication train with each person only knowing what’s going on in the layer above them,” the secondary investor said.

Fraud concerns and bad actors

The biggest concern for downstream SPV investors is that they may not get any shares in SpaceX at all. Giovanni Pennetta, manager of Sestante Capital, was recently sentenced to four years in prison for fabricating access to non-existent allocations in defense tech company Anduril. The fear is that Pennetta is not the only deceptive sponsor. Investors at the bottom of these structures essentially had to confirm that every single manager above them was legitimate, but given the messy structures, it is likely some buyers did not vet the entire chain.

“A friend just shared in confidence — they bought SpaceX through a 2 layer SPV in 2021. The returns are supposed to be worth any fees, the only problem — the SPV manager stopped responding to emails or calls,” Nick Davidov, founder of venture firm Davidovs Venture Collective, posted on X last month. He wrote that the investor has not heard from the SPV manager for a year. Idan Miller, managing partner at secondary market Unicorns Exchange, is convinced that more bad actors will be revealed once lock-ups expire. “Once the lock up of the shares is removed, and these SPVs will start selling the shares, there will be some vehicles that will be revealed as scammers or fraud,” Miller told Bitcoin World.

Conclusion

SpaceX’s IPO is a landmark event, but it also serves as a cautionary tale for investors in multi-layer SPVs. The complexity of these structures, combined with potential delays, fee erosion, and fraud, means that many backers may not know their true position for months. As the lock-ups begin to lift, the full extent of the problem will become clearer, and the market will watch closely to see how SpaceX and regulators respond.

FAQs

Q1: What is a multi-layer SPV?
A multi-layer SPV is a structure where multiple special purpose vehicles are stacked on top of each other, with each layer pooling funds from investors to invest in a single company like SpaceX. This can create complex ownership chains and delays in share distribution.

Q2: Why might SPV investors not know their share count until lock-ups lift?
SPV managers cannot distribute shares to their investors until they receive the shares themselves from the layer above. With multiple layers, the distribution process can take months, leaving investors uncertain about their actual holdings.

Q3: What are the risks for investors in these SPVs?
Risks include receiving fewer shares than expected due to fee erosion, significant delays in receiving shares (up to nine months), and the possibility of fraud if the SPV manager is deceptive or unresponsive.