Beware of the Scammers

Yesterday, we explored the latest developments between SpaceXAI and Anthropic in The Bleeding Edge – Anthropic or Misanthropic.

It’s an interesting and unexpected business relationship between two companies that have been philosophically misaligned with each other.

And yet, a deal still got done out of necessity.

When any business gets down to brass tacks, necessity drives compromise.

SpaceXAI had something that Anthropic needed badly: one of the largest homogeneous GPU clusters on Earth.

Anthropic’s challenge is that it needs to keep its torrid growth going in order to meet its investors’ expectations.

And without enough computational resources, it cannot meet the demand of its customers, and it also won’t have enough compute to be competitive in developing its next frontier AI models, AGI, and ultimately artificial superintelligence (ASI).

As we reviewed yesterday, Anthropic has committed hundreds of billions of dollars of spend with cloud service providers for computational resources.

It’s not profitable, which means it needs to raise additional capital.

This has come at a surprise to some, considering that Anthropic just raised $40 billion at a $380 billion post-money valuation. One would think its coffers are full.

Many have said that should be enough for a while.

But the issue isn’t about having capital to sustain operations or to get to the point of generating free cash flow.

Exponential growth companies like Anthropic, OpenAI, or SpaceXAI need additional capital to accelerate growth.

These companies are in a torrid race to reach AGI and ASI as quickly as possible. And they are all contenders to win.

And the winner, or whoever takes the largest market share, will be worth trillions.

Institutional investors understand this.

Retail investors also sense it and want to participate however they can.

This is an ideal environment for scammers looking to defraud normal investors by claiming to offer direct ownership stakes in some of the most exciting private companies that are on a trajectory to going public.

Oversubscribed

It’s easy for scammers to obfuscate the truth in an environment like this, as the private markets are moving so quickly, and the goal posts seem to be moving almost monthly.

Take Anthropic, for example.

Last month, it raised at a $380 billion valuation.

This month, Anthropic is considering raising additional capital at a $900 billion valuation.

You might be wondering how that’s even possible.

How could Anthropic possibly raise capital just a month later, at more than 2X the valuation it had in April?

Well, around the time of its funding round last month, Anthropic announced major deals with Amazon (AMZN), Google (GOOGL), and Akamai (AKAM).

It also took in billions in new investment from Amazon and Google, further enhancing its credibility.

And, as we learned yesterday, it managed to cut an unexpected deal with SpaceXAI for the one thing that it needed even more than capital… AI compute.

We are nearing a frenzy unlike anything we’ve seen before. And investors are willing to buy in at a $900 billion valuation, given the developments of the last four weeks.

It’s unusual because it kind of feels like the dot-com bubble, and yet it’s grounded in real businesses experiencing exponential growth in revenues, with a clear path towards businesses that will gush free cash flow in the future.

It’s precisely because the businesses are so real, and the technology is demonstrably improving at an exponential pace, that investors are willing to invest at these extraordinary valuations.

Very smart institutional investors clearly believe that there is plenty of upside ahead.

They’re right, as long as it is with the right companies, the right technologies, and they understand the valuations.

This week will mark the beginning of what will become a frenzy unlike anything we’ve ever seen.

AI-specific semiconductor company Cerebras (CBRS) will be going public on Thursday this week.

It will be explosive, as the deal is reported to be 20X oversubscribed.

That means that there is 20 times the demand for shares than available. Extraordinary…

The SpaceXAI IPO will, of course, follow in June. OpenAI is planning to go public later this year. And Anthropic is targeting an October IPO.

Can you imagine what the markets will be like when these tech giants all go public?

And there are at least another hundred more exciting tech companies to follow.

This is an incredible time, certainly once in a generation, and it is going to be a heck of a lot of fun for my Brownstone Research subscribers… as we have been so well-positioned for what’s happening right now ahead of these incredible trends.

But it is critical to keep a keen eye out for scammers who target normal retail investors.

They are everywhere.

Anthropic’s Fine Print

If anyone reaches out to you via social media, e-mail, or messaging apps offering shares in Anthropic or any other private company, you should immediately assume it’s a fraud.

Unless you are an accredited investor, there is no way to invest directly in private companies.

But on some occasions, there are ways to gain direct exposure to an upcoming IPO through a fund or a publicly traded company.

These are, of course, the kinds of clever, lesser-known opportunities that we spend hours researching to bring them to our subscribers.

For accredited and high-net-worth investors, there are also a range of options to gain access to private companies through the secondary markets.

This is a bit of a gray area as it is not written about much, and the related companies can’t really advertise their offerings. So it’s one of those things that you have to know where to go to gain access, and you have to have the capital to do so.

But secondary markets are not without risk.

Recently, Anthropic actually posted about this very subject, and I’d like to share the details.

It’s truthful, with good intentions, but there is also quite a bit of nuance that is worth exploring.

Source: Anthropic

Anthropic’s point is that if its board hasn’t approved the sale or transfer of Anthropic stock, the transaction will be considered void.

The implications can be huge.

If a high-net-worth investor thinks that he/she purchased $5 million of Anthropic stock via a special purpose vehicle, that investment is void from Anthropic’s perspective if it hasn’t been approved by the board.

Anthropic even went so far as to name “unauthorized firms” that are active in the secondary markets offering exposure to the shares of private companies.

Source: Anthropic

This is where there is some nuance.

Playing It Safe in Secondary Sales

The cleanest form of a secondary sale comes when an executive or employee of a private company sells their shares directly to an investor or group of investors, and that transaction is approved by the board of the private company.

This ensures that the name(s) of the investors are on the capitalization table (cap table). And when the company goes public, they will receive shares of the company, which would be distributed to a brokerage account.

But one of the most common mechanisms for secondary market brokers is to structure these investments as forward contracts.

An employee agrees to sell forward a certain number of shares to investors.

The shares don’t actually change hands at the time of the investment, but the cash does.

As the name suggests, the employee agrees to transfer their shares in the private company after it goes public.

The employee and their shareholdings remain on the private company’s cap table (so there is no need for any board approval).

The employee, however, signs a binding legal agreement facilitated by the secondary markets broker that requires the employee to transfer their shares once the company goes public, or the cash value if the company is acquired prior to an IPO.

This is legal, and it doesn’t require the approval of Anthropic’s board.

The employee benefits because he/she receives cash for the investment at an agreed-upon valuation, and the investor gains access to the desirable shares and receives any upside value in the future.

Sometimes these are direct party-to-party transactions, and sometimes investors are bundled into a special purpose vehicle (SPV) with the same construct.

Anthropic’s post on this subject can be viewed here, but keep in mind that it is misleading in the sense that it suggests that forward contracts are invalid.

With that said, it is absolutely critical to understand the quality of the brokers that you might be doing business with.

I do a tremendous amount of research to understand the players, who is behind them, where they are based, the structure of the investment vehicles, their track records, and whether there is any outstanding litigation regarding their business.

Please be particularly careful about any unsolicited contacts promising shares in private companies. It’s very pervasive right now, and it will get much worse after the frenzy begins.

And anytime a party is using high-pressure tactics, asking for transfers via cryptocurrencies, or quick wire transfers, you can be almost certain that it’s a scam. And please know that I would never personally reach out to anyone through social media, e-mail, or direct message making such an offer. If you receive an email from what looks like a personal email address or a direct message on social media from “me” soliciting investment funds, you can be sure that it is a scam.

I have only one X address, and you can find me at @BrownridgeJB on X. We only reach out to you through official Brownstone channels – and, of course, we do recommend you whitelist our addresses to ensure you don’t miss any of our legitimate alerts, updates, invitations, and missives:

• brownstoneresearch.com
• feedback@e.brownstoneresearch.com

There are a lot of fake impersonators of me, so please be careful.

There are smart, safe ways to gain access to private companies with enough research and analysis. And investors can gain exposure to high-quality private companies via publicly traded securities and investment funds. In such funds, the vehicle itself holds the private shares, and investors benefit from exposure without direct ownership. As the valuation increases in private companies, so does the value of the fund proportionately.

It’s just as important to avoid the scams as it is to find these clever ways to grow our wealth and take part in the largest productivity boom in history.

Jeff