The Shadow Market Behind Anthropic's Stock

The secondary market for private company stock, particularly for highly sought-after companies like Anthropic, is a complex and rapidly evolving space. Dio Casares from Patagon explains that Patagon operates in two core businesses: proprietary investing and a client-facing business that helps clients access secondary deals. This gives them a front-row seat to the dynamics of this hot market. Casares distinguishes between two main types of secondary transactions. The first, which he terms "primary secondaries," involves new money entering the company, often through Special Purpose Vehicles (SPVs) created to invest in funding rounds. This includes employees selling their shares, which is typically approved by the company as it provides liquidity to employees and can indirectly benefit the company. The second type involves existing investors cashing out, which has historically been more difficult and often tied to IPOs or acquisitions. However, with companies staying private longer and raising significantly larger rounds, the need for secondary liquidity has grown. The FTX bankruptcy, for instance, led to a large block of Anthropic shares being sold due to the bankruptcy proceedings. Management teams of private companies often view the secondary market with distrust, perceiving it as a potential competitor to their primary fundraising efforts. The sheer size of current private market rounds and the extended timelines for companies to remain private have fueled the growth of this secondary market. Casares elaborates on the distinction between company-approved secondary sales and those that are not. Approved transactions are often structured as direct deals, where the company facilitates the sale, ensuring it's on the cap table and benefiting from the capital raised. Large private equity firms have been involved in such company-approved rounds for Anthropic. In contrast, unauthorized secondary markets are characterized by platforms like Forge and Hive. These platforms identify blocks of shares and then broadcast these opportunities to a wide audience, often without rigorous vetting. They frequently aim to acquire shares at a discount to the prevailing market or round price. This practice can undermine a company's primary fundraising efforts, as investors might opt for a secondary purchase at a discount rather than investing directly in a new round. Casares notes that companies like OpenAI and Anthropic have conducted employee tenders, allowing employees to sell shares directly at the round price, as a means to manage secondary liquidity and prevent off-market transactions. A significant concern in the secondary market, particularly in the US, revolves around securities regulations. Private company stock is subject to holding periods, typically six months. The ability for individuals or entities to repeatedly buy and sell these shares in the secondary market could be interpreted as a violation of these regulations. Companies like Anthropic and OpenAI are aware of this and do not want regulators to perceive them as ignoring potential illicit activity. Casares emphasizes that Anthropic, if aware of such markets, has a legal obligation to act. The scale of this phenomenon is substantial, with estimates suggesting tens of billions of dollars are involved in Anthropic alone and a broader private market exceeding $200 billion in recorded secondary market transactions and funding rounds. Fees in these transactions can be significant, with some deals involving 10% one-time fees plus carry, meaning a $10 billion round could generate $1 billion in fees. The "wild west" nature of this market is illustrated by anecdotes like a Hinge profile mentioning friends at Anthropic for offering zero-fee dates, and a tweet stating that brokering an Anthropic secondary deal generated more money than the tweeter's entire net worth from their 20s. This highlights the insider access and lucrative opportunities within this market. Casares explains that access to Anthropic stock is not straightforward; one cannot simply approach the company to buy shares. Instead, a market has emerged where individuals with access sell that access, and others with buyers sell those connections. This has led to individuals, including those at funds, making more money in secondary transactions than in primary investments, driving a shift into this market. The market structure involves people who have access and sell it, and people who have buyers and sell them, with some doing both. This has created a competitive environment, though Casares notes that initially, it was less professional, with more pure brokering. Now, more players are handling the entire process, leading to more professionalized operations, but also a decrease in the fees that can be charged. A significant risk is the potential for fraudulent transactions. Casares describes scenarios where fake share certificates are presented, which is outright fraud. He estimates that 10-20% of executed deals might involve fraud, and a larger percentage might involve individuals claiming access they don't truly have, leading to failed transactions. There's also a gray area of gross negligence, where individuals might not intentionally defraud but fail to conduct adequate due diligence. The emergence of multi-layered SPVs (second, third, fourth tier) is a response to the "coincidence of wants" problem. If a seller has a large block of shares, but no single buyer matches that amount, multiple smaller buyers are aggregated through SPVs. These SPVs can charge fees, and this layering increases the risk that the claimed equity actually exists. While SPVs are seen as better than outright unverified transactions due to tax filings and compliance, companies like Anthropic have taken aim at specific fund administrators, like Sidecar, for allegedly not performing sufficient due diligence. The risk of shares not being real is a primary concern. Casares recounts seeing share certificates that are demonstrably fake. While whistleblowing is an option, clarity on whether the fraud was intentional or a resale of fraudulent shares can be an issue. He believes gross negligence is a distinct category from outright fraud. Proper due diligence, using resources like Pitchbook and verifying cap tables, is crucial for direct sellers. The concept of "forwards" also introduces risk. These are agreements to buy shares in the future, often based on employee shares. If the employee's shares are later rescinded by the company (e.g., due to corporate espionage allegations), buyers of forwards can be left with nothing, even if they paid fees. Casares points out that in the US legal system, one is innocent until proven guilty, creating a complex situation where individuals might profit from such deals even if they are later found to be illegal. When a company like Anthropic eventually IPOs, the secondary market transactions will need to settle. This process can be messy due to the multi-layered SPV structure and varying distribution rules of different funds. Delays in the DTCC process can further complicate the distribution of cash or stock to the ultimate beneficiaries. Some SPVs might choose to hold onto shares to benefit from potential price appreciation, creating a waterfall effect where upstream investors cannot receive their shares. This could lead to hedging strategies that might be in a legal gray area and potentially result in lawsuits. Casares anticipates that after an IPO, banks and brokerages will scrutinize these past transactions, and some may refuse to sell shares if Anthropic declares them void. However, he believes that once a company is public, the incentive for Anthropic to void transactions diminishes, as the game theory of maintaining private market structure is no longer in play. He expects litigation to be extensive and take years to resolve, with significant financial stakes. The primary victims are likely to be smaller investors who entrusted their money to intermediaries that either engaged in fraud, gross negligence, or simply mishandled the process. A common scenario for mistakes involves individuals raising money through an SPV for a promised share purchase. If they then spend the raised capital before actually acquiring the shares, they are left unable to fulfill their obligations when the shares don't materialize. The private markets are enormous and companies are staying private longer, creating an unregulated "wild west." While not entirely unregulated, the market is under-policed, with authorities overwhelmed and often prioritizing more serious offenses. This situation is compared to the early days of crypto with low-float, high-FDV metas. While there's genuine technology behind companies like Anthropic, the market dynamics can lead to speculative excesses. Traditional banks are often too slow to adapt, creating space for new firms. There's a trend away from directed capital into funds towards directly managed capital. Casares predicts a more professionalized secondary market in the US will emerge after the current cycle, potentially leading some investors to return to traditional VC funds after experiencing losses in the current speculative environment. Patagon's philosophy is to add value beyond simple introductions. They underwrite deals, ensure shares are real, and properly structure vehicles, allowing clients to invest directly on their platform. They aim to provide more than just access, offering ancillary services and protecting clients through due diligence. They have handled complex deals, including employee forwards for crypto companies, involving detailed reference checks on individual employees. This rigorous approach builds a solid client base and allows them to secure access to difficult-to-obtain deals. For individuals holding Anthropic or other secondary shares with uncertainty about their legitimacy, Casares advises caution. He suggests being wary of buying more and, if a bad gut feeling exists, getting out of the position. He notes that tokenized shares or synthetics, while potentially risky in terms of funding, might have different regulatory implications than direct equity. As IPOs approach, the prices of these instruments should theoretically converge with the public market price. Casares's Twitter handle is @Dioynes.