“This isn’t great. We need a lawyer.”

This is something I had to say recently to an investor who asked me to audit their investment in SpaceX following the company’s confidential filing. Note: this is an entirely fictitious amalgamation of (unfortunately) a lot of investors I’ve encountered over the last 8+ years.

The situation? The investor (UHNW+ with several other venture capital investments) made a not-insubstantial SpaceX investment a few years ago. They thought they were investing in a fund that held shares of SpaceX. The fund charged an upfront fee, which they were happy to pay. They were told they would receive SpaceX shares upon its IPO.

They had actually invested in a fund that invested in another fund, which held shares of SpaceX. The ultimate fund was named nowhere (publicly) as an investor in SpaceX. Their fund manager refused to provide information about the underlying fund, citing confidentiality. They referred them to their signed fund agreements, which:

  1. Said the vehicle they had invested in (paraphrased) “held or would eventually hold direct or indirect exposure to shares of [SpaceX] or similar assets.”
  2. Gave them no inspection rights.
  3. Mentioned 20% carried interest (which was not something that was ever discussed);
  4. Mentioned distribution expense deductions (which were also not discussed)
  5. Said the form and manner of distribution was entirely at the discretion of the fund manager, so the chances of getting shares post-IPO were virtually non-existent.

Other fun facts:

  1. The signed subscription agreement (in an exhibit) had a typo that mentioned an entirely different fund to the fund the investor had invested in.
  2. They had annual tax statements, but these were issued from a tiny accounting firm, headed by an accountant who had been fined by their state board of accountancy for inadequate procedures and staffing.
  3. The fund was (obviously) not audited and had issued no annual statements.
  4. The fund manager simply stopped responding, with a brusque note “I am in the middle of several closes right now. Will get back to you.”

It’s easy to blame the investors. “Did you not diligence the investment? How could you be so stupid, you deserve what you get”. I don’t. I’ve seen firsthand how this could happen to anyone.

I started in the pre-IPO space 8 years ago, when the market was nascent. Since then, it’s 10x’d in size with huge numbers of brokers and syndicators entering the market. Many of these folks look credible, they are extremely good marketers and salesmen. They use high-pressure tactics “this is an exclusive allocation to an Elon Musk company, the deal is closing in three days, the fund is 3x oversubscribed, if you miss out here, you will miss out on an opportunity for generational wealth, like missing out on Apple in the 1980’s. A16Z and Sequoia are invested in this company. This is a fund manager I know well. Rest assured the underlying fund has the shares, they are a super famous investor. Here are the terms. If you don’t want to do it that’s completely fine, I have eighty other people I’m going to call after this. But if you don’t do this deal, I won’t let you into my fund that does deals in Anthropic, Neuralink and OpenAI. Here is a (very credible-looking) investment memo, here is a 50-page fund agreement, and here are my wiring instructions to an account at JP Morgan Chase.”

Here’s something else. The fund manager or broker? Their funds look real. Their rolodexes are very good, they seem to know everyone. They name-drop that they were at a party with Jared Kushner. They give you diligence packets. You don’t always know what you’re looking for, but you believe in the growth of a company like SpaceX, and everyone else seems to be doing it. You’ve never felt like an insider, and this feels like the kind of networked deal that you read about in the Wall Street Journal after it happens at high echelons. Perhaps this is how it’s done? You’ve never been an insider. You’re tired of watching fortunes get made on the sidelines.

So you do it. You wire $1M to their bank account and execute the fund subscription agreements. Your lawyer had some misgivings, but was so incredibly unfamiliar with the space that they eventually told you it was your own risk to take. You sent their questions to the broker or the fund manager. He answered them well enough, but reiterated that you had 3 days to sign, that he was holding an allocation for you, that the deal was 4x oversubscribed by this point, and that everyone would likely get cut back. And this turned out to be true. You wanted to commit $1M to SpaceX, you only got $500k. Your money was promptly returned. Everything felt like a whirlwind, and it was so exciting. You felt like you got into something real.

This could describe individuals, small family offices, sometimes even large multi-family offices who got caught up in the frenzy of venture investing over the last 8 years. I’ve seen it first-hand. I’ve transacted and advised investors for over $200M in SpaceX. I’ve seen funds get filled in 3 business days, with zero diligence. As an insider, I had the luxury of extensively vetting opportunities and knowing most of the players in the space. There are very few funds and brokers I haven’t seen, and around 5-6 I would actually work with. But if you’re not from this world, it’s so, so easy to invest in something that is categorically a bad investment. And it’s not your fault if you did.

Not all investment opportunities in SpaceX were bad. In fact, there are some great, transparent, vetted dual-layer opportunities that will deliver your shares in full. But there is a minority (I suspect a strong one) that is not.

If you invested in SpaceX – you need to hear this. Now is the time that all the metaphorical ravens come home to roost. Unscrupulous fund managers were banking on the company never going public. Now would be a great time to review your subscription agreements and tax statements, reach out to your fund manager to make sure they are responsive, and have a plan for distribution, and can tell you exactly what you are going to receive. The good ones will. If yours won’t (or you discover some surprises in your documents), my DMs are open. I know a lot of people, I’ve reviewed thousands of agreements, I know some great lawyers and regulators, as well as some excellent brokers. We can figure out your investment and what to do next. Feel free to reach out.