Why a buzzy fund that advertised stakes in hot startups like Anthropic suddenly plunged

By William Gavin and Isabel Wang

Shares of closed-end fund Destiny Tech100 have been whipsawed this week, reflecting the promise and peril of trying to access stocks before their IPOs

Trading in shares of Destiny Tech100, a closed-end fund that invests in private companies, highlighted the frenzy for pre-IPO companies in the current market and the potential transparency issues associated with trying to invest in them. The fund gained 30% on Monday, May 11, and lost a quarter of its value on Tuesday.

Investors have poured into buzzy funds that promised exposure to some of the biggest private companies. Now warnings from private artificial-intelligence labs Anthropic and OpenAI have spooked some investors, leading them to worry the funds might not own stakes in those startups after all. These warnings are not new, but social media fueled jitters about them this week.

Destiny Tech100 DXYZ has emerged as one of the few widely popular ways for investors to get access to a growing cohort of private firms that boast massive valuations and are staying private for longer periods of time. The closed-end fund's top six holdings, led by Anthropic and SpaceX, were all purchased through special-purpose vehicles, or SPVs, according to Destiny's website.

The website mentions a portfolio of "marquee names" including Anthropic, which made up 18.1% of the fund's portfolio exposure as of March 31, and SpaceX, which made up 14.5%. "These private companies are shaping our collective future, and we invite you to be part of their journey - and ours," the website reads.

Both Anthropic and OpenAI are heavyweights in the private market, touting massive valuations. Along with SpaceX, they are part of a group of megacap companies expected to go public as soon as this year.

See more: Here's who benefits if the S&P 500 eases its rules for 'megacap' companies

Anthropic on Monday updated its web page warning investors about unauthorized stock sales, mentioning a handful of firms it said were not authorized to buy or sell its shares. The update triggered a reaction from social-media users, who pointed to the months-old section of the webpage that said Anthropic does not permit SPVs to acquire stock or for shares to be transferred to an SPV.

Specifically, Anthropic said on its website that it does not permit SPVs to acquire its stock and that any transfers of shares to an SPV are considered void. "We do not permit special purpose vehicles (SPVs) to acquire Anthropic stock," the website says. Any offer to invest in Anthropic's fundraising rounds - the latest of which could reportedly value the company at $900 billion - through an SPV is prohibited, according to the company's website.

Adding to the clamor on social media, OpenAI on Tuesday updated its website with a post that reiterated its own warnings against investing through SPVs. OpenAI emphasized that while not every fund that offers investors exposure to OpenAI's equity is "problematic," the fund offering the exposure might be attempting to dodge OpenAI's restrictions on stock transfers. In that case, OpenAI said it would not recognize the sale.

After the opposition by Anthropic and OpenAI to SPVs was given new life on social media, investors sold shares in closed-end funds like Destiny Tech100 on Tuesday, when shares of that fund fell by more than 25%. They were up 2% in Wednesday morning trading.

The fund's founder, Sohail Prasad, said fears are overblown.

"This investment was made after thorough diligence of the investment structure and the underlying documentation," Prasad said in a statement on his fund's stake in Anthropic. "We are confident in the investment and its accounting treatment, which is consistent with applicable methodologies."

He added: "Any reporting that implies otherwise lacks factual knowledge of our actual investment."

See more: A buzzy fund offering access to pre-IPO companies like Anthropic and OpenAI is plummeting

Anthropic's warning

Anthropic has been warning investors about investment scams since at least February, when it first published a web page listing common techniques used by scammers.

This week, Anthropic said it was aware of several firms and individuals offering access to shares that the company has been selling in various private rounds. Anthropic also named eight firms that it said were not permitted to buy or sell its shares, saying, "the following firms are not authorized to buy or sell Anthropic shares."

Some of the firms Anthropic highlighted, such as Open Doors Partners and Unicorns Exchange, say on their websites that they provide accredited investors access to pre-IPO companies through a variety of means. Anthropic also pointed to "new offerings" from Forge Global and Hiive, two prominent marketplaces for pre-IPO stock trading.

Additionally, Anthropic mentioned Pachamama Capital, which claims to also provide access to OpenAI and Figure AI, as well as Lionheart Ventures, a venture-capital firm that named Stability AI co-founder Cyrus Hodes as a venture partner.

In a statement, Hiive said that it shares Anthropic's concerns and that all share transfers facilitated on its platform are approved by the issuer. Forge told MarketWatch that Anthropic had allowed earlier transactions on its platform and that it is seeking to remove its name from Anthropic's alert.

Pachamama, Lionheart, Open Doors Partners, Unicorns Exchange and UpMarket, which was also named by Anthropic, did not immediately return a request for comment. Sydecar, the eighth firm, said it operates in an administrative capacity and requires sponsors to confirm they have the consent of a company before stock transactions are held.

The naming of the eight firms was the actual addition to Anthropic's warnings for investors on Monday. But it was the company's broader warnings about SPVs that drew attention on social media.

"There is just too much SPV grift built up in the system, especially around Anthropic stock given major FOMO from Family Offices and [high-net-worth individuals]," Soumitra Sharma, general partner at the venture-capital firm Operators Studio, wrote on X in response to Anthropic's post. He added that "unfortunately, many unsophisticated investors will be left holding the bag in the end."

Brian Norgard, an investor and former executive at the dating app Tinder, also commented on the issue on X. "If Anthropic starts invalidating layered SPVs and other 'creative' financing structures, private markets are in for a reckoning," Norgard wrote. "The SpaceX IPO will expose just how much synthetic ownership and outright fraud has accumulated in privates."

Anthropic said it does not permit SPVs to participate in its financing rounds or to acquire its shares. It also criticized investment funds that offer indirect access to its shares.

Groups of investors can use SPVs to pool their funds to invest in a single startup. While proponents say that SPVs allow greater access to the private markets, critics point to a number of concerns, including fees that are often high.

Read more: You can invest in SpaceX before its IPO - but should you?

Some platforms that target retail investors offer SPVs with management fees or upfront commissions of 10% or more, plus 2% annual fees and 20% carried interest on any gains, according to Nasdaq Private Market. Since investors in SPVs aren't actually recognized as directly holding a stake in the underlying startups, the private companies also aren't inclined to provide them with information about their businesses.

There's another feature that market participants say could be problematic. It's not always clear whether the SPV can buy the underlying stock in the first place or whether the private company would recognize the transaction underlying the ownership. Things can get even murkier when SPV layering is involved.

"Each added layer may reduce transparency, add another layer of fees, and weaken the investor's visibility into the underlying asset," Eric McCarthy, managing principal of the Atlanta-based investment firm Immoderata, told MarketWatch over email.

That's part of why some startups criticize SPVs. The founders of defense-technology startup Anduril have been especially harsh in their criticism.

"How many investors in America think they own a chunk of SpaceX when they're actually funding their ex-roommate's boyfriend's coke habit in Miami?" Anduril co-founder Matt Grimm said on the online talk show "TBPN" in January.

"This isn't a blanket comment that all secondaries are bad," he added. "There's a category of these people who just have no respect and are basically just fraudsters and hucksters."

The frenzy by investors to access hot startups prior to an initial public offering has made them vulnerable to criminal behavior. Federal authorities last December indicted Giovanni Pennetta, the manager of New York-based Sestante Capital, for stealing millions of dollars from clients. Federal prosecutors said Pennetta provided access to a private fund that falsely claimed to have access to Anduril shares. Pennetta pleaded guilty to one count of wire fraud in March.

In another case, federal prosecutors said New York-based venture-capital firm Vika Ventures falsely claimed it had access to pre-IPO shares in SpaceX, Palantir Technologies (PLTR) and Airbnb (ABNB). It was paid nearly $6 million by clients to buy shares in their preferred companies. Instead, the firm's CEO used that money to fund a lavish lifestyle. In 2023, he pleaded guilty to conspiracy to commit wire fraud.

'A total lack of transparency'

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