Let the Private Companies Stay Private

Before Facebook went public, you could only buy shares on the 'gray market'...

If you searched hard enough back in 2012, you could find "shares" of Facebook floating around. These were private shares that left the hands of employees one way or another... and ended up on the pseudo-public market.

Less-than-fully-legal exchanges popped up to help trade these private stocks. They weren't officially sanctioned as broker-dealers with the U.S. Securities and Exchange Commission ("SEC"). But they also weren't outright illegal.

One company in particular, called Forge Global, started orchestrating "forward contracts" with large startups. It would give startup employees cash for the right to give their stock to another investor.

And while these startups didn't want trades like this to happen... they didn't always have a good way to prevent it.

Of course, anyone can buy shares of Facebook – or Meta Platforms (META), as it's now known – these days. But as we'll explain today, these gray-market private investment vehicles still exist for a lot of up-and-coming companies...

And we're still wary of buying them.

In March, a former Forge employee launched a fund called the Destiny Tech 100 (DXYZ)...

Destiny is similar to Forge in that it acquires private shares in "unicorn" startups – meaning private companies worth more than $1 billion – using forward contracts.

But founder and CEO Sohail Prasad went a step further... because he took his fund public.

Everyday investors finally have a way to own some of the hottest startups on the planet, like payment giant Stripe, Elon Musk's SpaceX, and even AI juggernaut OpenAI.

Less than a month after the fund launched, it had skyrocketed more than 1,000%. However, it has since fallen almost all the way back to its starting price.

It might seem like Destiny is a good buying opportunity today. But we wouldn't recommend it... because it's still operating in an extremely gray area.

Destiny does technically own the rights to shares in these startups. That said, they may not be worth anything. Stripe in particular has said shares obtained in this manner are completely void. It claims employees don't have the right to transfer their shares outside the company.

But because all of these investments are private, investors in the Destiny fund have no way of knowing this. And it could be the same situation with any of the other 22 startups Destiny claims to own.

Said another way, it's impossible to know how valuable any of the fund's stock is.

As frustrating as it sounds, investors should wait their turn to own a piece of the latest tech startups...

Don't bet blindly on a fund like Destiny. There's too much risk involved.

Private companies have far less oversight than public ones. They don't have to disclose their financials to the public. And any shares that make their way out of said companies could be worthless.

Destiny would be happy to take your money without telling you that... And you'd be better off resisting the urge.

If you're looking for investments with a lot of upside potential, stick with small public stocks. Microcaps (below $2 billion) have the most room to rise.

Plus, they're already public... which means they publish their financials and have to report to the SEC.

While they might not always have the same allure as unicorns, their returns can be just as strong.

Regards,

Joel
July 26, 2024