Photo by REUTERS/Dante Carrer
Background
The collapse of FTX Trading Ltd. (“FTX”), which filed for Chapter 11 bankruptcy last November, continues to dominate headlines. On the eve of its implosion, the crypto exchange was market valued at $32 billion and boasted industry leading investors (among others):
NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital (“Sequoia”), SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings (“Temasek”), BlackRock and Thoma Bravo.
Prominent celebrities like Larry David, Tom Brady, Giselle Bündchen, Shaquille O’Neal and Stephen Curry cut ads or became ambassadors for Sam Bankman-Fried’s (“SBF”) operation.
15 U.S. state and local pension funds committed capital and face potentially tens of millions in losses. Canada’s Ontario Teachers Pension Plan could be out almost $95 million.
Shark Tank’s "Mr. Wonderful”, Kevin O’Leary, an investor’s investor, claims to have lost out on $15 million in FTX promotional fees.
Now calling his FTX investment a bad deal and himself a victim of groupthink, O’Leary earlier crowed about the compliance law backgrounds of SBF’s Stanford law professor parents.
If the parents are compliance lawyers and SBF said he takes regulatory issues seriously, then what’s there to worry about? The same was said about Madoff’s years of steady returns, as investors and asset managers reassured themselves that a one-time Chairman of NASDAQ could never be a fraud.
Retail Investors Abandoned
Conspicuous exceptions like Chamath Palihapitiya’s Social Capital notwithstanding, many sophisticated investors across industries failed to see the smoke spewing from the five alarm FTX fire. This, despite the commercial and regulatory aftereffects of the Worldcom, Enron and Madoff scandals, which should have compelled such investors to at least overhaul their diligence processes and rely less on perceived trust and assurances from interactions with an investment target’s management.
Regulators in the Bahamas where FTX was incorporated did not spot the red flags and move against the company. Neither did U.S. authorities, despite the extensive business and physical connections between FTX and the U.S. which could have provided a basis for jurisdiction, intervene ahead of time.
What about unsophisticated retail investors considering the crypto space or trying to make sense of the FTX collapse to protect themselves and their money from the next scam? Lacking the time, resources and knowledge to properly diligence SBF’s operations themselves, many piggybacked off the diligence and public statements of FTX spokespeople and sophisticated investors. They believed their cash and crypto assets committed to FTX and/or traded over its exchange were safe, and that SBF was revolutionizing his industry.
Bottom line: if you are a current or potential retail investor in a new or emerging industry company like FTX where market leaders are piling in, assume that you are on your own and need to take proactive, and not always free, steps to protect yourself and know as much as possible about what you are getting into.
You should internalize the lessons of the FTX collapse and take precautions now to avoid another, possibly larger, scam.
***Upgrade your subscription and read on for more about how FTX’s high-profile investors got it wrong, the red flags so many missed and the business law tools you can use to shield yourself and your money from the next FTX.
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