Latest news with #SpikeDay
Mint
01-07-2025
- Business
- Mint
A hot new firm opened the private market to the little guy. Now it is in big trouble.
In January 2023, the chief executive of the private stock investment firm Linqto announced a 'Spike Day," a one-day sprint to boost sales to its customers—small investors looking for a shot at buying shares of coveted private companies. 'Take no prisoners," the now-former CEO, William Sarris, wrote in an email to staff, reviewed by The Wall Street Journal. 'This is guerrilla warfare." Sarris was trying to unload shares of Ripple, a privately held crypto company, to Linqto's 11,000 users, at a price at least 60% higher than what Linqto paid. The Securities and Exchange Commission generally prohibits markups above 10% but Sarris pushed ahead, not disclosing the price hike to customers, and the company pocketed $2 million, according to people close to the situation. An outside law firm later reviewed the transactions and warned that Linqto's actions may constitute securities fraud, according to a memo reviewed by the Journal. Now it's looking even worse for Linqto and its customers. An internal investigation has turned up evidence that Linqto customers never owned the securities they thought they did and that the company was marketing to some investors who may not have been eligible to buy stakes in private companies in the first place, according to an internal memo. It's all ending badly, with the company barreling toward a possible restructuring through bankruptcy, according to the new management, and facing investigations of its practices by the SEC and Justice Department. Linqto, which maintains about $500 million on behalf of thousands of investors around the world, was one of the earliest firms to capitalize on small investors' growing eagerness to buy into highflying private companies. Its trading platform helped pioneer a private stock trading avenue for the little guy, with fewer rules and less regulation than the public market. Its 'guerrilla" tactics harked back to the days of boiler-room trade operations, featuring blast emails and posts on social media hyping up stocks and playing on customers' fear of missing out—or 'FOMO"—on new investments, most of them sought-after tech companies like Elon Musk's SpaceX and the artificial intelligence company Anthropic. 'Throw everything we have at this one targeted date…influencers, marketing, ads, social, calls and smoke signals," Sarris wrote to managers about Ripple. When one employee pushed back on promotional emails, citing worries by the company's lawyers about mentioning specific companies, he replied: 'Forget what legal says." More than a dozen other platforms selling shares in private companies have opened to retail investors in recent years, including StartEngine, Hiive and Forge. Demand for the new platforms has been driven by investors who want a piece of the action in the private market. During the pandemic, low interest rates and stimulus checks fueled individuals' desire to buy up private companies. The number of so-called unicorns—private companies valued at $1 billion or more—has shot up to around 1,275, from 90 a decade ago, according to research firm CB Insights. Now, the SEC and the Justice Department are looking into whether Linqto failed to adequately disclose its pricing practices and whether Sarris sold shares customers thought they owned without telling them, according to a person familiar with the situation. Sarris left his CEO post in March. That same month, Linqto acknowledged that an internal investigation had turned up 'serious securities law violations," at the company. 'Much of what we discovered about the prior business practices at Linqto is disturbing," said Dan Siciliano, Linqto's new chief executive officer. 'These practices aren't small one-off, compliance or common regulatory missteps." When contacted in early June about this story, a lawyer for Sarris said at that time he had no comment. In March, Sarris signed a memo alleging that new management overstated the severity of Linqto's violations of federal securities laws in a bid to seize control of the firm. A subcommittee of Linqto's board found the allegations 'groundless." All of Linqto's investors have been locked out of the holdings they believed they owned because of the investigations, including those who invested in the Ripple 'spike" sale and more recently in Circle, a crypto company that went public to much fanfare in June and whose stock is now trading at around six times its IPO price. The SEC permits 'accredited" investors, or those with a net worth of more than $1 million or annual salary of more than $200,000, to buy and sell private shares, under the theory that such people should be sophisticated enough to navigate the potential hazards. There were 24.3 million U.S. households who qualified in 2022, compared with 1.5 million households in 1983, after income thresholds were first established, according to SEC estimates. Massachusetts lawyer John Deaton says he invested $495,000 of his net worth in private companies through Linqto. John Deaton, a Massachusetts lawyer who attended board meetings as a customer representative, says he invested $495,000 of his net worth in private companies through Linqto. Deaton was a believer in Linqto's business model: 'The big investment firms have all these barriers of entry for real people," he says, but if Linqto marked up prices on shares and misled its clients, 'then all they did was take advantage of unsophisticated investors," he says. Moody's Ratings warned recently that the push to sell private investments to retail investors could stress the financial system. At the same time, lawmakers are being lobbied by big private-equity players and retail brokerages to make it easier for small investors to get into the market. Last year Republicans on the Senate Banking Committee introduced a bill to allow any investor capable of passing an exam to buy private securities. Investor-protection advocates have pushed back, saying changing the rule would water down necessary safeguards for investors while enriching Wall Street. The San Jose offices of Linqto are now mostly empty cubicles, with the trading platform shut down. Sarris, 74, majored in applied mathematics and talks often about his memory for trivia, including the stats for every baseball player, no matter the year. He and his wife, Vicki, founded Linqto in 2010 and cycled through a series of ideas about what business it should pursue before landing on the private trading platform for retail investors. The company said it would make private equity investing easy, and 'democratize" the rarefied private markets. Greg Kidd, a neighbor at a San Francisco co-working space who became one of the first investors in Linqto, had connections at Ripple, and he helped Sarris get access to pre-IPO shares of the crypto company to sell on Linqto. Other pre-IPO companies, including the payment company Stripe and Fanatics, a sports-merchandising company, followed. Sarris gained the nickname 'Wizard of Oz" because he pulled levers controlling the firm's sales and strategy, often without telling anyone around him and without warning. He sometimes expressed disregard for Linqto's lawyers, saying in one email: 'If I think legal should be overridden, I will tell you." At town halls for the company, he laid out an ambitious vision, saying Linqto would become a major player for selling private shares and the next multibillion-dollar company in the financial-services industry, one attendee recalled. Linqto rose in popularity as it advertised low investment minimums. Customers could buy stakes in their favorite private companies for as little as $1,000—compared with $10,000 or even $100,000 on other platforms with higher minimums. The company even allowed some people who weren't accredited investors to participate in the deals. Thomas Lennon says he was offered an opportunity to invest in Ripple even though he wasn't accredited. Among them was Thomas Lennon, 33, who in September 2024 invested $10,000 in Ripple—the minimum amount for a promotion offering investment 'slots" to 35 who weren't accredited, he said. 'That's a lot of money for me," said Lennon, who says he was excited to have a chance to buy the crypto company. 'This was my first time dealing with private equity," he said, but says 'it was a chance I was willing to take because I wanted access to Ripple shares." With minimal checks about income and assets, customers like Lennon could start buying into private companies. Loyal users were encouraged to recruit their friends in order to earn 'Linqto bucks," credits they could use in their accounts. Sarris and his team whipped up demand by blasting out emails and alerts suggesting that a hot private stock was in short supply—even when Linqto had access to plenty of more shares. Hours or days later, the company would follow up with emails announcing a sudden, supposedly new availability, emails show. The ultimate goal was to push the price of private stocks as high as possible, according to internal emails that were reviewed by the Journal. In 2022, for instance, Sarris urged a manager to increase the price of software company PolySign to $3.25 per share from $3 to boost Linqto's revenue by $600,000. 'We can turn it into a Unicorn via our platform," Sarris said in an email. Linqto didn't just profit from selling shares of private companies to users. Sometimes the deals went the other direction. At the end of 2023, Linqto learned that Ripple, which remains private, was preparing to buy back shares from customers at roughly $61 each. Linqto reached out to customers, who were in the black on their Ripple investments, and convinced them to sell 144,000 shares of Ripple back to the company at an average of $55 per share, according to people close to the situation. It then sold them all to the crypto company at the higher offering price, booking more than $8 million in revenue. The SEC and Justice Department are investigating whether Sarris improperly sold an additional 16,000 shares of Ripple without the permission of customers, according to people familiar with the situation. Linqto sought to ramp up its business by creating special purpose vehicles, or SPVs, to hold the shares. SPVs put investors one step away from actual ownership of shares because they own units of the SPVs, rather than the stock itself. The SPVs allowed hundreds of new investors to buy into the SPVs without officially being registered as shareholders by the underlying company. It was a way around SEC requirements that limit the number of investors private businesses can have without going public. It also allows smaller investors to buy pieces of very expensive private companies. Linqto created more than 500 of these vehicles, and the plan was to put customers' investments in these funds. But it isn't clear if the shares were ever formally put into the SPVs, according to company documents and current employees, throwing into doubt the identity of the actual owners of the shares. In its rush to sign up more users, Linqto also pushed other boundaries, buying email lists that contained prospective customers from sanctioned nations such as Iran and North Korea. They signed up roughly 100 customers who said they were from those countries, according to people close to the situation. The customers didn't end up buying shares through the platform, these people say, but businesses are prohibited from even recruiting from blacklisted countries. By early 2024, Linqto's business was thriving and it boasted nearly 750,000 registered users on its platform. By the time it shut down there were well-heeled customers, including about 80 customers who invested $500,000 or more and about 20 who invested more than $1 million. In April of 2024, the company announced a $700 million merger with a publicly traded special-purpose acquisition company, or SPAC, a deal that would have netted Sarris and other executives millions of dollars in stock. Ahead of the deal, Linqto hired an external law firm to conduct a review of its business practices. The law firm came back with a damning 18-page memo—written a few months after the Ripple 'Spike Day"—warning the company that it was potentially violating multiple federal laws, including antifraud provisions of U.S. securities laws. The external lawyers advised Linqto to 'immediately cease" charging markups for shares. In September 2024, Linqto abandoned the SPAC merger. A short time later, the SEC informed the company it was starting an investigation into its business. Linqto's own lawyers were also sending warning signals. In an eight-page memo, they worried that its tactics were potentially illegal and outlined roughly a dozen recommended changes, including no longer allowing its customers to 'self certify" that they were accredited and avoiding any possible exposure to 'severe civil or even criminal penalties," according to the memo. In January 2025, Linqto brought in new managers, led by Dan Siciliano, the founder of a smaller startup that offered employees of private tech companies a way to sell their shares. Siciliano, who was hired as an eventual successor to Sarris, brought in another law firm, Sullivan and Cromwell. People familiar with the matter said Linqto began cooperating with the SEC investigation at that point. The DOJ launched its own probe in early 2025, according to a person close to the situation. The new CEO, Siciliano, is bracing for a fight with customers but said in an interview he believes 'there is a path that preserves their value." These days Linqto customers—once giddy about private market investments—are anxious about whether they will get access to their investments, or even get their money back. A group of customers, many supportive of prior management, recently launched a grassroots campaign to try to 'free" Linqto. If Linqto files for bankruptcy reorganization in the coming days, as people close to the situation say is expected, its customers will likely be transformed into unsecured creditors who will have to wait in line to get paid. Write to Susan Pulliam at and Corrie Driebusch at
Wall Street Journal
01-07-2025
- Business
- Wall Street Journal
A Hot New Firm Opened the Private Market to the Little Guy. Now it Is in Big Trouble.
In January 2023, the chief executive of the private stock investment firm Linqto announced a 'Spike Day,' a one-day sprint to boost sales to its customers—small investors looking for a shot at buying shares of coveted private companies. 'Take no prisoners,' the now-former CEO, William Sarris, wrote in an email to staff, reviewed by The Wall Street Journal. 'This is guerrilla warfare.'
