We haven’t looked into one of the overblown “buy private stocks” pitches for a while, so this one caught my eye… and it helped, of course, that they had a good hook — dropping hints about “private codes” usually gets my attention, and this ad implies that there’s a secret “cheat code” you can use to find pre-IPO companies.
So what is this “cheat code,” what are they talking about with these Pre-IPO deals, and, perhaps most importantly, what’s this “next $1 billion unicorn” they say they’re recommending now? Let’s dig in and see what we can find.
We should start with who the “they” is. The pitch is for Private Market Profits, a $995 subscription (30-day refund) offered by the private investing site Crowdability, helmed by Matt Milner. They promise to offer up one investment recommendation per month, like most investing letters, but in this case they’ll all be private investments — which really just means, “stocks that aren’t listed or traded on the stock exchanges.”
I’ve covered I think just one pitch from this particular newsletter before, when they were pitching private investments in the “Space WiFi” stock Solstar in 2019 and 2020, though we do see private investments teased pretty regularly by a bunch of newsletters, with the most aggressive pitchers probably being the “Angels & Entrepreneurs” and cannabis folks over at Money Map Press (and, spoiler alert, I’m not often convinced that these pitched private investments are a reasonable risk).
Here’s how this latest one from Crowdability gets our attention:
“Write this number down immediately: 0001139685
“This secret “code” could help you turn a small $1,000 investment into $24,970…”
Can you guess which words the lawyers insisted on adding to that headline? We know there’s always a qualifier, so “could” is a gimme… but I’ll bet the legal team said “help you” is important, too.
That’s because those code numbers, while they do exist, are really only marginally useful — and that’s being kind. They can offer a tiny bit of help in confirming a company’s identity, or researching what they’ve filed with the SEC (yes, if you raise money by selling equity or debt you typically do have to register with the SEC, even if you don’t intend to list on a stock exchange), but you can’t just search for those numbers, plunk down your $1,000, and become a millionaire.
So we’ll start with that — what are those numbers? Here’s how Matt Milner describes them:
“Baked into the ‘DNA’ of each of these breakthrough tech startups is what I call a ‘Pre-IPO cheat code…’
“And these ‘cheat codes’ could get you into the startup while it’s still private — in the words, you could invest in it before its IPO.
“Each code is exactly 10 digits long.
“And just like human DNA is unique to just one person, each of these codes is unique to a specific startup.
“To be clear — these codes aren’t stock market ticker symbols. And they’re not codes for corporate bonds, options, warrants, or anything else you may have heard of before.
“But once you know these codes, and once you know the specific websites that list them…
“You can invest in these companies before they go public… and that’s how you can position yourself for huge windfalls, right alongside the wealthy and the well-connected.”
Well… sort of. The “cheat codes” he’s talking about are just the CIK numbers given to companies when they register with the Securities and Exchange Commission — a serial number for a company, more or less, used to help make sure that companies (or other filers) with similar names are not confused, and that all the filings for that relevant person or company get combined together into one place. Knowing the CIK number perhaps makes it slightly easier to look up a company in the SEC’s EDGAR database of company filings, but usually just knowing the name is enough.
That doesn’t really help you to find out about new offerings, though… or to determine which ones might be most appealing to you, or might still be open to new investors. The CIK says much less about the company it’s attached to than your Social Security Number says about you.
So no, there is no “cheat code” to riches in private investing. But let’s dig into what he’s talking about a little bit.
The explosion in “Pre-IPO” companies (and in the ranks of websites and newsletters professing to pick such companies for you) was caused by the newly relaxed rules from the SEC over the past decade — what we’re usually talking about are Regulation A/A+ offerings, which were created by the JOBS Act in 2012 and amended (to create A+) in 2015.
Effectively, Reg A lets companies raise smaller amounts of money from individual investors without facing the stringent SEC registration requirements that typically accompany an IPO, and lets them raise money from pretty much anyone … as long as they raise less than $50 million (and the rules are even easier for “Tier 1” companies raising money under Reg A+, which means they raise less than $20 million in a year). It used to be more cumbersome for small companies to raise money outside of the venture capital ecosystem, and it was also generally true that private placements of equity like this were restricted to “accredited investors” — basically, people who had enough money that they could essentially attest that they could afford to lose their entire investment ($200K in annual income or a million dollars in investable assets has been the rule for “accredited” status, though that was expanded last year to include “people who can prove they know what they’re doing,” like people with certain certifications or credentials in the investment world… most of which would meet the other criteria anyway). Those rules were there to protect small investors from getting scammed — but yes, it also means they got left out of some private investments.
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These unlisted private companies who are raising money still have to file with the SEC (and thus they get that CIK number), but it’s far simpler than the back-and-forths you see with a company doing a large IPO or secondary offering through a prospectus, and the small ones don’t have to continue to file regular earnings reports or anything like that, or even annual reports. There’s a pretty good basic overview from the SEC’s Investor.gov website here.
How does that help you find these companies? It doesn’t, not really, it just might make it slightly easier to research them once you have identified them. The “finding” part for private offerings is not so different than “finding” public stocks you want to buy — private companies who need capital publicize themselves, they join marketplaces (private funding marketplaces instead of stock exchanges, in this case), and, in a junior version of the IPO roadshow to pitch to institutional investors or the CEO’s appearance on CNBC for a “real” IPO, they hire or work with brokers and distributors and they hit up anyone with a following (newsletters, social media. etc.) to get the word out and try to drum up interest. Some of them are much better at this than others.
The idea from the newsletter’s perspective, of course, is to pitch these as “back room deals” where you have to be “in the know” to get a piece of these hot business ideas… and the reality, as you might imagine, is usually far different. These are little startup companies who are trying hard to raise money, promoting themselves and paying marketplace companies like SharesPost or OurCrowd or MicroVentures or StartEngine or EquityZen or whoever else for advertising or access to investors, and they are in most cases thrilled to get your attention and are trying to figure out how to attract investors. A lot of these companies are trying to pitch and sell these ideas, though there are certainly rules about what promises they can make in advertising, it’s just that they don’t have huge marketing budgets so they probably haven’t reached you yet unless you’re actively looking on those kinds of platforms (or getting pitches from middlemen, like the newsletter publishers).
And despite what the ads for these companies all try to imply (if not actually say), you do not have to be in a “club” or pay for a subscription to participate in most private fundraisings from these kinds of companies… though, to be fair, it is true that it’s a confusing world and paying someone to do the work for you to screen out these companies has some appeal if you don’t intend on making it a hobby to become a small-time angel investor. That involves a high degree of trust, though, because these kinds of companies are NOT liquid investments — once you’re in, there’s no guarantee that you’ll be able to get out… and the odds are not good, as you probably know intuitively, that the company will grow to the point that it goes public and gets some liquidity and becomes traded on an exchange where you could then easily sell your shares. Some do, every once in a while you might find a great private company whose product or service or management team you love, want to support, and make money from, and that’s the dream, but many will keep raising money for years before they become real cash-flowing businesses, and many will be worth less or have disappeared entirely five or ten years from now.
And the promise is always that you can get into a great world-changing company like Facebook or Twitter before anyone else has heard of them… which is probably a daydream that it’s best to get out of your head before you pull out your credit card.
You know who doesn’t need to hit up individual investors for $2,000? Anyone with a really sexy idea, or an established business that’s growing revenue and has obvious potential to scale. They can get a huge check from a venture capital firm or even just one wealthy individual, and immediately get some experienced board members and advisors and plenty of cash to get the business juiced up fast. Yes, it’s possible that some small entrepreneurs don’t want to follow that path — they want to keep full control, or they had bad experiences with VC investors in the past… but this is not Facebook and Twitter we’re talking about here, these are generally extremely early stage companies in niche businesses who have not yet proven the commercial viability of their product in any meaningful way.
They do drop some examples… Twitter is one of them, so how do they pitch the idea that you could have used a “secret code” to buy into Twitter? Here’s a little from the ad:
“But in case you don’t believe me, take a look at this screenshot of Twitter’s Pre-IPO Cheat Code from a public government database:
“See the 10-digit number in the red circle?
“That’s the “cheat code.”
“The key here is this code was assigned BEFORE Twitter went public.
“And don’t worry if this screenshot looks complicated.
“This is simple. You’ll see how it all works in a few minutes.
“The key thing to remember is this:
“If you can find the Cheat Code to these companies before they go public…
“And if you know how to get your money in early…
“That’s how you get a shot to multiply your money exponentially. That’s the secret to making this work.
“In other words, by using the “Pre-IPO cheat codes” — in the specific way I’ll show you how to do today — you can claim a real ownership stake, real equity, in these breakthrough companies.”
So yes, that is Twitter’s CIK code. And yes, they registered with the SEC several years before they went public in 2013, because they were raising money from venture capital investors as early as 2007 — but they weren’t selling shares directly to small investors like you and I, they were selling to big venture capital firms and strategic partners. The only feasible way for you and I to buy shares of Twitter before 2013 would have been through one of the few publicly traded funds that owned Twitter shares (in 2012 and 2013 pre-IPO, GSV Ventures was the way to get exposure to Twitter if you were a small investor — that fund later became SuRo Capital (SSSS), it has ridden the pre-IPO popularity of hot stocks for years, first Facebook, then Twitter, then most recently Palantir). Twitter was not asking you for $1,000 to jump aboard in 2008 or 2009, and they wouldn’t have taken it if you offered.
Similar story with Square, which is also talked up as a past winner:
“Square had a secret that few investors know about.
“It had a Pre-IPO Cheat Code… it was 0001512673.
“And if you’d known this 10-digit code….
“And if you’d found a way to invest in Square’s pre-IPO shares…
“You’d be sitting on a return of 250,100%!”
It’s not knowing that 10-digit code that’s hard, anyone can find that — it’s that second “if,” “if you’d found a way to invest in Square’s pre-IPO shares.” That’s not so easy with any company that has any brand power or established business — they don’t need to recruit small investors, and their shares of popular ones are almost never available in the private markets, or if they are available it’s very near IPO time, when they’re already multi-billion-dollar companies and there are some insiders who want to sell on the secondary markets because the IPO is taking a little longer than they had hoped (and sometimes, those late private sales in the year or two before the IPO take place at higher prices than the company eventually trades at after it goes public — not so much this year, when investors have been IPO-obsessed, but that was common in years past).
They do get into what this “Cheat Code” is later on in the presentation…
“Well, once you know a company’s CIK code, you can see every piece of information that it’s required — by law — to file with the SEC.
“And for investors like us…
“This information is a gold mine…
“For example, it reveals the size of the market opportunity the company is targeting…
“How big the company could get in the future…
“And how much money we could potentially make from an early investment.
“It also reveals who else has already invested, who the company’s competitors are, and how soon the company could potentially go public or get acquired.”
But, again, knowing the CIK code doesn’t really tell you anything that knowing the name would tell you. Yes, companies will file their required info with the SEC (though it’s quite limited in some cases), and yes, you can find it if you know either the name or the CIK code. But really, that’s like saying, “the secret to finding great investments is to know the name of the company so you can research it.”
Also, in further top-secret news, the way to cheat the system is to research something before you invest in it.
So that’s the basic backdrop — no, this ain’t secret, a CIK number is just an identifying number for a company in the SEC’s database. And, to overstate the obvious, most tiny startups are junk and never go anywhere and lose all their money — this is not an area to get involved with unless you want to really dig in and get to know the company as well as a board member might. I’m not going to do that for you, but I can at least get you started on ID’ing this particular investment.
Which company, then, are they promoting? Well, a quick look at that CIK number would get you there awfully fast… but let’s do it the old fashioned way, with a look at their clues…
“… we’ll be providing specific recommendations about which pre-IPO deals to get into, including your very first recommendation: “This Tiny Startup Could Be The Next $1 Billion Unicorn.”
“… this tiny private company takes advantage of what I call a technology “super-cross.”
“A super-cross is rare. It happens just once every few years.
“It takes place when two massive tech trends cross paths for the very first time — and for early investors who understand what’s happening, it can create a “big bang” of profits.
“For example, when the internet crossed with social media, companies like Facebook and Twitter went to the moon.
“When smart phones collided with biometrics, the shares of Apple’s “secret suppliers” skyrocketed.
“And now there’s a new super cross — and I’ve found what I believe is the best startup to take advantage of it.”
Milner says he owns stakes in 57 different startups, and the examples he gives of the type of company that “could potentially help you pocket gains of at least 1,000%” include some of the private companies that have been pretty widely promoted by pre-IPO marketplaces and newsletters in the past, like LiquidPiston and Solstar, as well as some others that I don’t know offhand like Leaf, Beat Bionics, HelloMD and Circle Medical, and Milner says he recommended private investments in Cruise Automation and ReWalk Robotics in recent years that would have led to 1,000% and 400% gains, respectively.
He does not mention any of the losers by name, though he does note the risks of private investing and note that this is a “money you can afford to lose” investment, and he points out that a major risk is the lack of liquidity and the need for a company to either get acquired or go public, on some uncertain timeframe, before you’re likely to be able to sell your shares (either at a loss or a profit). Those are not empty words, take them to heart.
But back to that tease about their latest recommendation:
“I’m going to show everyone on this presentation a Pre-IPO cheat code…
“A cheat code we’ve never revealed publicly before…
“A cheat code that could help them get into one of the most groundbreaking biotech companies we’ve ever identified…
“In fact, if my forecasts turn out to be correct…
“This single investment could hand investors profits of 2,497%… and possibly far more.”
So what’s the company?
“… it’s a biotech company.
“And it’s developed a disruptive new way to detect cancer at its very earliest stages.
“I’m sure we’ve all known someone… a friend… a family member… who’s suffered from cancer. It’s just awful…
“And as you may know, the key to beating cancer is to detect it while it’s still in the earliest stages.
“For example, if you can detect cancer while it’s still in Stage 1, meaning it hasn’t spread to the whole body yet, it’s much easier to treat and overcome.”
So apparently someone already has that “holy grail” cancer screening blood test that giants like Grail and Guardant Health and others are hoping to have by 2025? More from the ad:
“This startup has developed blood tests that look for the biomarkers that accompany cancerous cells.
“Using the three trends I told you about — Big Data, Artificial Intelligence, and Machine Learning — its system alerts doctors to the potential threat of cancer, and makes them aware that follow-up testing is needed immediately.
“And furthermore, this test doesn’t require CT scans, or x-rays, or any radiation exposure at all.
“It only requires a single draw of blood.
“And from that single blood sample, this test can screen for several cancers at once — including liver, pancreatic, and cervical cancers.
“And at $149 per test, it’s very affordable.”
OK, so we already knew the name of the company, since they gave us the CIK code, but now that we’ve confirmed it with all the clues and hints we can say that yes, this is 20/20 GeneSystems, a private company which has been raising money from small investors using Reg A for several years. They’re partnered with the StartEngine service to recruit investors for a fundraise of up to $14.7 million right now, so you can see their fundraising page here. The minimum investment is $500, and they’re selling shares at $4.40 per share. If they sell all of those shares, the effective valuation of the company (with about 11.5 million shares outstanding) would be about $50 million.
And, yes, that StartEngine page is very promotional, it’s a sales pitch to get you to invest… but the page also links to those SEC filings, which you can find either from that StartEngine page or just by searching the SEC’s Edgar database for either the name of the company or the CIK. Those are generally more boring and also go much more into the risks, so read them.
As always with tiny private companies, I would only really feel comfortable investing in them if I could do the same kind of due diligence I’d do if I were buying into a local business, a restaurant or a dry cleaner or a car dealership. There’s no promise that you can get out, there’s no guarantee that the business will succeed, so get really comfortable with the management team and the strategy and get the risks clear in your head before you think about the possible gains.
Here’s how the company describes itself:
“20/20 is pioneering a brand new approach to improve the accuracy and usefulness of conventional clinical lab testing. Rather than simply reporting the biomarker levels, in the way they have for decades, we leverage vast amounts of real-world data together with machine learning to compare the individual’s test results to those of tens of thousands of others with known health outcomes. This proprietary technique is already being used to improve early cancer detection and will soon be deployed to monitor the immunity protection after vaccination. Plans are in the works to expand to heart disease and other chronic conditions.”
And in the SEC filings they get into some detail about the “OneTest” product that is their core offering:
“In the second half of 2018, we began focusing on the commercialization of OneTest, a multi-cancer test and algorithm to screen for multiple cancer types from a single blood sample. OneTest is modeled on the testing approach common in East Asia where millions of healthy individuals receive cancer biomarker tests as part of yearly health check-ups. Real world data from over 40,000 individuals tested with the seven-biomarker panel over a 12-year period is the foundation of this test. Importantly, our algorithms and analytics substantially improve the accuracy of cancer tests currently used by physicians, hospitals, clinical labs, and health check centers in many parts of the world – without requiring new equipment or change in diagnostic testing practice. The algorithm combines the levels of protein biomarkers – like CEA, AFP, PSA, and others, with patient information (e.g. age, gender, smoking history, etc.). We report patient risk of having five or more cancers (liver, lung, pancreas, and the like) and recommend follow-up testing with the objective of finding early tumors that can be surgically removed before they become fatal. We operate our own laboratory with a Certificate of Compliance (General Immunology) through June 2022. In May 2018, we acquired, installed, and validated the automated immunoassay analyzer manufactured by Roche Diagnostics needed to run OneTest (this same analyzer is also being used to run a COVID-19 antibody test as discussed below.) All of our standard operating procedures were in place per CLIA requirements before the end of August 2018, after which we began several targeted sales and marketing campaigns.”
So it’s not really a proprietary blood test, those already exist for those tumor markers and are pretty widely used — like the PSA test for prostate cancer. So this is not the more advanced DNA screening tests or various other technological approaches that are being advanced by lots of different researchers, with the hope for a single “cancer screening” blood test that can identify early-stage tumors — the way I see it this is a possible stopgap on the way to that hoped-for future, using several existing cancer screening blood tests and a patient survey, combined with AI and machine learning, to try to provide a risk score for individuals.
That means they don’t need FDA approval, since they’re using existing blood tests and just interpreting them differently, but I’d guess that’s a pretty fine line and there’s probably some risk — if they’re selling something as an early-stage screening test for multiple cancers, even though those blood tests are all individually approved and the “score” given is derived by analyzing the data from those blood tests, not from some new kind of test, I wouldn’t be surprised if the FDA bangs on their door at some point and says, “um, exactly what are you promising?”
They are trying to commercialize and “scale up” the business with this money from the equity offering, they hope to make the test available in retail pharmacies and partner with one of the big lab chains so they don’t have to do all the testing internally, and they hope to get agreements with many of the screening centers outside the US, where these kinds of cancer screening blood tests are more commonly used (particularly in Asia), to earn royalties by providing their software and the OneTest algorithm to those testing clinics.
The fundraising has not been particularly easy for them, they launched this Reg A offering over a year ago with the goal of raising about $14.7 million, in January of 2020, and as of July when the offering was updated they had raised about $1.2 million… they did some shifting around to try to get more investors, moving from StartEngine to SeedInvest in May last year, and getting that total investment up to about $3.6 million, then switched back to StartEngine in December. As of February, when they last provided a supplemental update to the SEC, they were still pretty close to that total and still have $11 million left to raise (about 2.5 million shares are left, out of 3.3 million authorized as the maximum). Raising millions of dollars $500 at a time (or even $5,000) is pretty hard, and it’s not unusual for it to take these companies a long time to get there — or to fall far short.
20/20 GeneSystems is not new to this game, they’ve been raising money through “crowdfunding” sites for several years, and through Reg D offerings with smaller VC investors going back at least five or six years, and in fact their SEC records go back to paper filings of Reg D. offerings back in 2002 and 2004. I don’t know how the company hass changed over the years, but the price per share at which they’ve raised money over the years has gone up, so I guess that’s a positive, and they have also filed to indicate that they will be part of StartEngine Secondary, which could create a secondary market for the stock and provide some liquidity for investors who want to sell their shares to other investors. Given that there’s $11 million yet to raise, I would assume that a secondary market anytime soon would more likely depress the share price, but perhaps it will provide better liquidity in the future if the company does actually begin to grow revenues and develop a better following among investors… and it would probably be easier to recruit new investors if they thought they had a clearer possible “exit” option.
20/20 says they’ve got some initial traction with firefighters, who are at elevated risk for a variety of cancers, but that most of their revenue growth in 2020 (which was impressive, hitting $2 million vs. less than $300,000 in 2019) came from increased use of their lab for COVID testing (cancer detection experienced “some growth”, they said). I would expect their COVID-related business to dry up pretty fast, but they are also expanding their office space and lab property in Maryland (moving from Rockville to Gaithersburg, probably this Summer), and thinking about bringing in other partners with an incubation space in that lab for small testing startups, so who knows what the future holds.
And that’s about all I can tell you after skimming through their StartEngine presentations and a couple of their SEC filings. I won’t be investing, but I can see how there could be some potential if they can really commercialize their testing system before the next wave of DNA cancer screening tests become available, assuming that they don’t face a marketing crackdown from the FDA. And I know plenty of folks out there in Gumshoedom find private investments appealing, so if you’d like to opine on this one please feel free to do so with a comment below.
Before I go, though, I thought I’d share some detail on another story that Milner cites as a pre-IPO success — just because it’s an interesting story. He drops the name of Jamie T., an early investor in UK crowdfunded beer company BrewDog, to show the big returns he received, and that is a true story (at least, as reported here), but it also gives you some perspective on how silly these promotional startups have to be, and how persistent, to actually get anywhere, and how long it can take. That story has some great quotes, by the way, about the “punk” BrewDog going mainstream, here’s a little taste:
“When the chance arose to buy shares in their second round of fundraising (Equity for Punks II) in 2011, I used money from an unexpected tax refund (so very punk) to commit myself fully to their ‘revolution’.
“It was an act of faith more than a hard-nosed investment, but I still believed they were going places, and dismissed talk on blogs that EFP was little more than a glorified BrewDog fanclub.
“But, as BrewDog grew, with three further rounds of investment, and exponential expansions to their brewery and their chain of bars, it started to lose a lot of its charm.”
And the “five years later” story, in 2017…
“It seemed those £95 worth of shares I bought back in 2012 were now worth a lot more: £2,630 to be precise.
“The potential of a 2,700% return on something that wasn’t much more than an act of solidarity and the chance to feel part of a special club now sits in my Computershare account, glistening with seductive fiscal potential, taunting my deeply held punk ethics.
“An IPO is in the offing, and those shares could be worth a lot, lot more very soon.
“Now I’m truly torn. The DIY collectivist angel on one shoulder is telling me to wash my hands of this filthy lucre; divest as soon as possible, and donate the money to a lesbian badger sanctuary in Estonia or something, and then sleep soundly.”
And yes, BrewDog still exists… though it wasn’t quite on the verge of an IPO in 2017, as they thought, and it still hasn’t gone public — which might mean those private shares weren’t terribly liquid, I’m not sure if Jamie T. had a chance to sell them if he wanted to, but there are some secondary marketplaces where private shares can sometimes be traded, if the company consents, so he might have. As of last month BrewDog is again planning an IPO this year, so we’ll see. This was a rare “pretty big” success story in crowdfunding investments early on, here’s a quote from that IPO story last month:
“To enable Brewdog to build its strategy, a key source of funding has been its crowdfunding program ‘Equity for Punks’ which launched in 2010, has attracted almost 150,000 global participants, and has raised some £80 million. The scheme has served to create a vested interest among the company’s userbase, making them more like advocates than mere customers.”
I’d be much more likely to become a private investor in a beer company than a blood test company, just because it would be more fun and delicious and therefore I wouldn’t worry as much about the fact that I’d probably lose my investment (or drink it), and that tends to be the story with crowdfunding investment pitches in my experience — fun consumer stories or really cool tech stories tend to work the best and attract the most excited investors, because investors can be either fans and customers or high-tech dreamers who get less hung up on things like current revenue and earnings. BrewDog was a phenomenon, they raised about £100 million altogether, spent 15 years building the business, and now have about £200 million in annual revenue and £1 million in profit. Still tiny, and I have no idea how investors on the LSE might value them if they go public soon, but they did also raise some private VC capital at a $1 billion valuation a few years ago, so presumably the IPO will only happen if they’re well above that.
And I’ve chewed your ear off enough, so I’ll leave you there — if you’ve got thoughts on these early stage investing platforms like StartEngine, experiences to share, or an opinion about OneTest and 20/20 GeneSystems, well, please feel free to chime in with a comment below. Thanks for reading!
Disclosure: Of the companies mentioned above, I own shares of and/or call options on Twitter and Guardant Health. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.