As It Awaits SEC Trial, Felix Investments Peddles New Secondary Funds

Felix Investments may be battling the SEC, but that isn’t keeping the New York-based firm from charging into new territory on an almost monthly basis.

According to an email recently sent to investors by Felix co-founder Frank Mazzola, Felix is now selling shares in funds that sound a lot like GSV Capital, the closed-end mutual fund that promises investors a chance to own stakes in privately held companies.

The firm’s pitch is a bold one. Specifically, says Mazzola’s email, the focus of the new funds, named NYAI 1 and NYA2, will be to acquire stakes in late-stage venture companies at a discount to their current market valuations. The discounts, he writes, will “in many cases” be as much 40 percent to 50 percent, providing investors in the funds paper profits of “25 percent to 50 percent” on “day one.”

Mazzola’s email says the funds’ goals are each $5 million with a hard cap of $10 million and that once funded, they’ll be combined and will file for an IPO as a Business Development Corp., a category of closed-end mutual fund. He also says in the email that once the money has been raised, it should be just three to five months until the shares begin trading.

Mazzola wasn’t reachable for comment today; Felix’s Lower Manhattan offices are currently flooded, according to an employee of the firm. But a source familiar with the funds says the shares will be purchased through secondary market platforms such as SharesPost and SecondMarket, as well as acquired directly from privately held, venture-backed companies.

That Felix appears to be following in the footsteps of GSV – or  working as a placement agent for another entity that may be – is surprising for a number of reasons, beginning with the SEC.

The agency filed civil charges against Felix in March of this year over its sales of shares in privately held companies. The SEC claims that Felix – which became known in recent years for offering investors access to shares in highly hyped companies like Facebook, Twitter, and Zynga — was taking secret commissions from sellers of those shares, in addition to the fees that investors were paying the firm to acquire them.

Felix has so far refused to settle with the SEC and a trial is currently set to begin next spring.

In addition to possibly attracting more unwanted attention from the SEC, Felix appears to be heading down a very uncertain path. At least, firms that have created portfolios of secondary shares in an effort to attract more risk-averse investors have so far performed poorly.

GSV Capital, for example, which raised $50 million in a May 2011 IPO, saw its shares peak in early May at $19.01. But they’ve been sinking steadily since Facebook’s May 18th IPO, trading today at $8.

GSV, which owns shares in roughly 40 companies — including Twitter, Bloom Energy, Palantir, Dropbox, and Spotify —  reportedly bought Facebook at $29.92 per share. Facebook’s shares today are $21.94.

Firsthand Technology Value Fund, which also stocked up on pre-IPO Facebook, along with the privately held shares of Gilt Group, Yelp, and Solar City, has also seen its value pummeled. In April, its shares sold for $46.50 a piece. Today, they’re $17.93.

Perhaps because this new category of fund is still sorting itself out (or perhaps despite the fact), Felix continues to push individual, privately held stocks, too.

In early September and again on October 9, Mazzola reached out to potential investors, asking them to consider Felix’s 97,000 shares in the fuel cell technology company Bloom Energy at $20.50 a piece, a “discount” to Bloom’s most recent round of funding, which was completed in July at $25.76, according to Felix. (A Bloom investor confirms that a round in the “$150 million range” was closed in summer, though declines to say at what valuation.)

Earlier this month, Mazzola also emailed potential investors about Twitter, saying Felix had 110,000 shares of the company up for grabs at $15.52 a piece, or “about a $7.5 billion valuation,” noted Mazzola. Twitter was reportedly assigned an $8.4 billion valuation after its most recent financing round a year ago.

Photo: Image courtesy of Shutterstock.