Perhaps you've seen the ads on social media promoting "opportunities" to own shares of private companies before they go public. Usually, the promoters are focusing on well-known names with significant FOMO attached to them. Companies like SpaceX, Stripe, Grammarly, Anthropic, Anduril, Open AI, etc.
Realizing that private investments have become, and will be, a potentially important value creator for client portfolios, I have been on a mission for the last five years to identify and evaluate all areas of the private investment world - private equity, private credit, art, real estate, hedge funds, you name it. Our firm has even partnered with a reliable fund manager in New York to bring individual pre-IPO funds to our clients when they pass our diligence criteria. As great as some of these things are, our foremost concern is how fair and reasonable the provisions are for our clients. Are the fees and carry (profit-share with the manager) reasonable? Does the manager have experience in the asset class? In the case of individual pre-IPO assets, how hard does the manager work to obtain good pricing for the fund? And many other variables that require an objective, fiduciary review.
What I'm seeing in the retail (direct-to-investor) space is very troubling. This is NOT an area for DIYers. You must work with an advisor who knows something about these asset classes and I'm going to show you why.
StartEngine is one of the outfits promoting private securities direct to the public. Their spokesperson is Kevin O'Leary (Shark Tank's "Mr. Wonderful"), who never misses a chance to make a buck. At one time, I personally invested a small sum in the company itself and was encouraged by the democratization of private assets for everyone. And then I caught on to the subscription agreement wording. As it turns out, this manager, and others like them, assess horrendous fee levels on the investor - either overtly or buried deeply in the agreements.
What they are doing, which is uncounscionable in my opinion, is buying the securities in a fund entirely owned by StartEngine, creating a new fund purely for the investors, and selling the original shares from the corporate fund to the investor fund at a SIGNIFICANT mark-up. So significant, in fact, that it will be miraculous for any investor to be compensated for the risk, let alone make any money on these funds. Here are 3 real-world examples from their current offerings:
This is a summary of their Stripe offering:
Yes, you read that right. The markup between funds is 38% up front. They are buying the shares for $36.78 / share and selling them to the investor fund at $50 / share. Sure, there's no annual management fee and no carry (split of profits) when and if the company goes public or is purchased, but this 38% haircut up-front is equivalent to almost 20 years of a typical 2% management fee, and unlike the typical 20% carry, the MANAGER MAKES THIS PROFIT regardless of whether or not the investment performs.
What makes this even more heinous is the fact that these investments are not meant to be held for 20 years...a logical person would not invest in this if the hold period was expected to be any longer than 5-7 years, in my opinion.
Compare this to a more standard 2 / 20 fee structure (we actually see competitive management fees closer to 1% for the higher quality funds in this space:
Let's look at the StartEngine Crusoe Energy fund currently on offer:
And Finally, here's a company many of you may know, Grammarly, and their offering on StartEngine:
Should I go on? In my opinion, this is taking tremendous advantage of unwary investors. When I asked the founder of StartEngine about their methodology, he confirmed that this is their strategy, and that the details are in the PPMs for the clients to see. Call me skeptical, but I doubt that many investors pay much attention to the purchase agreement, and if they do, they do not know how to evalulate the terms, and besides, getting shares of XYZ before it goes public is exciting! And Kevin O'Leary must think it's a great deal too!
In short, don't buy this stuff direct. Use a fiduciary advisor who knows the landscape. Yes, there are great opportunities out there, but you'll rarely profit from them if you go in with your hands tied behind your back. And a 35%+ hurdle is way too much to begin with.
It's exciting! its' fun! It's a shiny red balloon! But if you take it, your money is likely to be dead.