(Bloomberg) — Collapsed fintech startup Linqto Inc. agreed to a deal to repay customers who were wrongly promised that they could get stakes in hard-to-acquire, private companies.

Linqto, which began offering private investments in 2020, was part of a wave of financial companies that claimed to make private markets more accessible with holdings in some of the hottest technology firms. Instead, it misled customers about what it really owned, before going bankrupt this summer.  

Under the proposal, which was announced during a court hearing Tuesday, the company would offer customers one of two options for being repaid. Customers can choose to accept shares in a closed-end fund that can be sold like any other public stock, or to get stakes in a trust that would only let them cash out at certain times, Linqto bankruptcy attorney Samuel A. Schwartz said in court.

The fund and the trust would both hold part of Linqto’s portfolio of stakes in private firms — including the likes of crypto startup Ripple and Elon Musk’s SpaceX — that is worth more than $500 million, according to court papers. The San Jose-based firm bought the stakes for itself and customers before shutting down and filing for bankruptcy in July while being investigated by federal regulators.

The demise of the online investment platform highlights the dangers to retail investors of buying stakes in illiquid and hard-to-value private assets. 

Lawyers for the company and customers say Linqto’s former managers wrongly promised customers they could buy stakes in private firms before these companies went public. In reality, the stakes bought by Linqto were held by special purpose vehicles the company had set up, according to court papers. 

Because the company’s actions violated securities laws, those stakes cannot be transferred to the customers who put money on Linqto’s platform, creditor attorney Kenneth Aulet said in court. 

For example, about 8,000 customers thought they had bought an interest in Ripple, Aulet said. But if Linqto tried to distribute shares to all of them, Ripple would instantly become a publicly-traded company under US securities laws, he said. Ripple would oppose that move, he said.

“This is a fraud case,” Aulet said. “What Linqto promised and what it delivered are very very different.”

The fraud was investigated by new managers, who worked with customer and creditor attorneys on the new plan. The deal will allow Linqto to avoid an expensive court fight over who has title to the securities, which is a complicated question tied to federal rules for accredited investors, lawyers said. 

The settlement between Linqto and two groups representing customers must be approved by a judge and then incorporated in a bankruptcy-exit plan. 

The case is Linqto Texas, LLC, 25-90186, US Bankruptcy Court, Southern District of Texas.

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