Liquidity Fragmentation: Special Purpose Vehicles (SPVs) in Focus

Secondary market platforms are using Special Purpose Vehicles

(SPVs) to facilitate the trading of shares of private companies, including popular startups in the crypto sector like OpenSea, which last raised funds at a valuation of $13.3 billion. 

Despite restrictions on stock trading imposed by startups, SPVs allow investors to buy and sell indirect interests in a company's stock by trading ownership interests of an SPV that holds the company's stock. This workaround has caused tension between startups and their shareholders, as it can result in shares being traded at steep discounts and can fragment liquidity, hindering trading.

Some startups have managed to avoid down rounds by weathering market downturns without needing to raise more money, but secondary market platforms like Forge Global offer an alternative way for investors and employees to mark-to-market their shares. For example, OpenSea, a leading NFT marketplace, has seen its shares trade at a 51% discount on Birel, a secondary market platform, as of March 5. 

OpenSea has prohibited unsanctioned secondary sales since March 2021, but sellers have been using SPVs or forward contracts to offer allocations to interested buyers in order to bypass these restrictions.

While this practice is common in the secondary market, some investors see it as less than ideal. SPVs come with additional fees and less control, as investors are one step removed from the actual investment. This fragmentation of liquidity and lack of direct share ownership can hinder trading and make it less attractive for investors. However, startups like OpenSea have not commented on their stance regarding this practice. 

Despite the challenges and tensions, secondary market platforms using SPVs continue to offer an alternative means for investors and employees to trade shares of private companies, including those in the crypto sector.

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