When entrepreneur Tejpaul Bhatia moved into the space sector in 2021, he expected to buy into one of the most coveted private companies on the planet. SpaceX was already commanding a private-market valuation of about $75 billion and its shares were tightly held by early investors and institutions near the company’s leadership. Unable to purchase shares directly, Bhatia used the secondary market, engaging brokers who facilitate trades in private-company stock. Today, as SpaceX prepares for a public listing that could value the company near $1.75 trillion, Bhatia believes he owns a piece of the business but acknowledges he cannot be completely certain.
"I hope I didn’t get duped," he said. "I don’t think I did, but again, there’s no way to know." Bhatia declined to disclose the size of his stake or the broker involved.
The possibility of a large windfall if SpaceX lists publicly has led many investors to accept arrangements that complicate clear title to shares. Rather than acquiring stock directly, buyers often participate through special-purpose vehicles, or SPVs, and other layered investment entities. These structures sometimes hold only the rights to acquire shares at a later date rather than the shares outright.
"You are relying on the counterparties in these transactions and their reputations," said Mitchell Littman, a New York-based attorney who advises SPV managers and secondary-market participants. He warned that heightened hype attracts opportunists. "Every time there is hype around these type of things, inevitably the fraudsters come out of the woodwork because they smell an opportunity."
Industry participants, investors and analysts interviewed report that mounting demand for SpaceX and similar private giants has prompted a rise in complicated deal structures. As some companies delay initial public offerings, investor eagerness to gain exposure before a listing has driven activity in secondary markets where ownership can change hands well before an IPO.
In many of these transactions, shares can traverse multiple layers of ownership. Two brokers who spoke about these deals said it is possible for shares to pass through as many as five intermediaries, each of which may levy fees and obscure the ultimate beneficial owner. That layering can limit the ability of later-stage investors to confirm whether the shares purportedly backing their investments actually exist.
Namek Zu’bi, who manages a fund with more than $500 million in assets, described the market as becoming "a little loosey-goosey" and said he declined some investor requests to participate in SpaceX deals because of worries about fraud. "A lot of people are going to make a lot of money," he said. "But you’re also going to get a lot of people who are surprised or shocked" to discover they do not own any shares when a company goes public.
Where SPVs are used, investors often can only see the entity immediately above them in the ownership chain, not the top-level holder of the shares. "That’s not enough to be certain the shares exist," said a senior executive in the secondary market industry.
Layered intermediaries also increase costs. Each intermediary can charge fees, which erode potential returns and compress the upside available to investors who bought in at elevated private-market valuations. Jay Ritter, a University of Florida professor emeritus who researches initial public offerings, cautioned that the principal pitfalls in such deals are overpaying and facing "multiple layers of fees." He added that companies priced at high revenue multiples tend to have limited upside relative to market benchmarks.
Those worries are amplified by recent pre-IPO fraud cases that have drawn regulatory and law-enforcement scrutiny to SPV structures and private-market deals. In December, financier Giovanni Pennetta was arrested at New York’s JFK airport on charges alleging he created a fake investment vehicle to sell nonexistent shares in defense technology company Anduril. Pennetta pleaded guilty earlier this month to wire fraud charges. Separately, a financier was sentenced in 2023 to eight years in prison after defrauding more than 50 investors who had given him nearly $6 million to buy pre-IPO shares in multiple companies, including SpaceX.
The Department of Justice has not publicly announced a pre-IPO fraud case involving SpaceX since that 2023 sentencing, but investors and market executives say SpaceX’s popularity has heightened the risk environment.
Fear of missing out plays a material role in driving participation in these complex transactions. Last month, Peter Wright, who sometimes intermediates between investors and brokers, received a text from another broker representing an Emirati sheikh, indicating a desire to buy a very large position in SpaceX. The message, which Wright provided, said that a family office was interested in buying about $1.2 billion of SpaceX stock immediately and was seeking a seller. Even an offer of that magnitude did not lead to a completed trade, officials who saw the message told Reuters, because the would-be buyer could not acquire shares directly and the transaction could not be closed.
Wright said his firm declines to participate in deals that involve more than one intermediary because such arrangements make due diligence impracticable. "At that point, diligence is impossible," he said.
Zu’bi said much of the appetite for SpaceX exposure is social as much as financial. He described investors who want the bragging rights of owning pre-IPO stock. "They want to say to their yacht friend, ‘Hey, I’m in SpaceX. Are you in SpaceX too?'" he said.
SpaceX, the Securities and Exchange Commission and the Department of Justice did not respond to requests for comment.
As the company moves toward an anticipated public offering, the market for private-company shares is facing heightened scrutiny from investors, legal advisers and market intermediaries. Participants say the combination of scarce primary-market access, rising valuations and complex secondary structures creates an environment in which verifying ownership and preserving potential upside can be challenging.
Investors who entered the market via brokerage networks or SPVs say they are gambling on the integrity of counterparties and the structures that stand between them and the underlying stock. For some, that risk will pay off; for others, it may mean holding little more than the paper trail of transactions that do not translate into an actual stake when a company lists.