Fintech startup Linqto Inc., which ceased operations and filed for bankruptcy earlier this summer, has reached a significant agreement to compensate customers who were misled about acquiring stakes in private companies. Launched in 2020, Linqto positioned itself among a new wave of financial platforms promising to democratize access to private markets, specifically targeting holdings in highly sought-after technology firms. However, investigations revealed that the company provided false information regarding its true ownership of these stakes, leading to its eventual downfall and a federal regulatory probe.

Under the terms of a proposed deal, announced during a recent court hearing, Linqto is offering customers a choice between two repayment mechanisms. The first option allows customers to receive shares in a closed-end fund. These shares are designed to be publicly tradable, similar to conventional public stocks. The second option involves receiving stakes in a trust, which would permit customers to cash out their investments only at pre-determined intervals, as explained by Linqto's bankruptcy attorney, Samuel A. Schwartz.

Both the closed-end fund and the trust will incorporate portions of Linqto's extensive portfolio of private company holdings, which court documents indicate is valued at over $500 million. This portfolio notably includes interests in prominent firms such as the crypto innovator Ripple and Elon Musk’s aerospace company SpaceX. Linqto, based in San Jose, had acquired these stakes for both its own accounts and its customer base prior to its collapse and July bankruptcy filing.

The company's demise underscores the considerable risks faced by retail investors when engaging with illiquid and difficult-to-value private assets. Lawyers representing both Linqto and its customers have stated that former managers erroneously assured clients they could directly purchase stakes in private companies before their public listings. In reality, Linqto held these stakes through various special purpose vehicles (SPVs) it had established. Creditor attorney Kenneth Aulet highlighted in court that these actions constituted a violation of securities laws, rendering the direct transfer of these specific stakes to customers impossible.

A key example cited was the approximately 8,000 customers who believed they had acquired an interest in Ripple. Aulet elaborated that any attempt by Linqto to distribute these shares directly to such a large number of individuals would, under US securities laws, effectively transform Ripple into a publicly-traded company, a move Ripple would strongly oppose. Aulet unequivocally characterized the situation as a "fraud case," emphasizing the stark discrepancy between Linqto’s promises and its actual deliveries.

The fraudulent activities were subsequently investigated by Linqto's new management team, which collaborated with attorneys representing both customers and creditors to devise the new repayment plan. This settlement is anticipated to avert potentially lengthy and costly legal battles over the complex question of securities title, a matter intricately linked to federal regulations concerning accredited investors. The proposed agreement, forged between Linqto and two customer representation groups, requires judicial approval and must be integrated into the company's final bankruptcy-exit strategy. The case is officially docketed as Linqto Texas, LLC, 25-90186, at the US Bankruptcy Court, Southern District of Texas.