I spend lots of time talking about special purpose vehicles (SPVs) and the Investment Company Act of 1940. Now we have a real-world example.
Anthropic was founded by Dario Amodei, who wrote the basic artificial intelligence model for OpenAI before leaving to start his own company. Once ChatGPT launched Anthropic has had no trouble raising money. They’ve raised $7.5 billion and counting in the last year.
In my humble opinion, the amount of money being thrown at Anthropic is insane. Most obviously, it demonstrates the psychological power of The Fear of Missing Out. More subtly, it represents the brokenness of venture capital culture. VCs have backed themselves into a position where they can no longer invest in businesses that are merely profitable. They need huge wins, grand slams. They bet a chunk of the farm on crypto/blockchain and lost. Now they need even bigger wins, or at least the promise of bigger wins, to keep their LPs writing checks.
Anyway, the flood of money created a problem for Anthropic that will sound familiar to many founders. The company was looking for billions, but many investors were able to invest “only” $30 – $50 million. The company didn’t want all those investors on its cap table.
So the company took the logical step: it put the “small” investors in a separate company, an SPV, and admitted only the SPV to its cap table as a single investor.
Because its business is limited to holding securities in Anthropic, the SPV is an “investment company” under section 3(a) of the Investment Company Act. Yet it has not registered as an investment company. How does that work?
The answer is that it qualifies for the exemption under section 3(c)(1) of the Investment Company Act, section 3(c)(7) of the Investment Company Act, or both.
The exemption under section 3(c)(1) is available if the SPV has no more than 100 owners. That’s possible. If each owner invests $40 million you would raise $4 billion.
(NOTE: the exemption under section 3(c)(1) allows 250 owners if the SPV follows a “venture capital strategy,” but this SPV was formed to invest in only one company, Anthropic.)
The exemption under section 3(c)(7) is available if each owner is a “qualified purchaser.” That term includes individuals with at least $5 million of investable assets, entities where all the individual owners have at least $5 million of investable assets, as well as other entities. I suspect the SPV qualifies under this exemption as well.
Thus, the SPV is an investment company under section 3(a), but is not required to register as such.
Finally, note that the discussion about the Investment Company Act doesn’t depend on how Anthropic raised money. It probably raised the money using Rule 506(b), taking the position that because everyone in that world knows everyone else, it had a “pre-existing relationship” with all its investors. But it could also have used Rule 506(c), assuming every investor is accredited. The point is that how you raise money and whether you need or qualify for an exemption under the Investment Company Act are unrelated.
I personally was not invited to invest in Anthropic. Imagine!
Questions? Let me know.
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- Source: https://crowdfundingattorney.com/2024/02/20/anthropic-spvs-and-the-investment-company-act/
