Charges have been filed by the U.S. Securities and Exchange Commission (SEC) against three top FTX executives, including Sam Bankman-Fried, but this is certainly not the end of the SEC's probe. Earlier this month Reuters reported the SEC is also seeking information from financial firms (yet to be named) that made significant investments in FTX regarding their due diligence processes used prior to investing in FTX.
While this particular area of the investigation is not necessarily an indication of any wrongdoing, the abundance of venture capital funds associated with, and deeply invested in, FTX raises some questions. Specifically, the SEC is focusing on details about what policies and procedures venture firms had in place when they chose to invest in FTX, and whether they were followed.
The list of FTX investors who in aggregate invested over $2 billion, and subsequently had to write it all off, spans an impressive "who's who" of well-known investment firms, including NEA, IVP, Third Point Ventures, Tiger Global, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Temasek Holdings and BlackRock. It also includes the Ontario Teachers' pension fund, one of Canada's largest pension funds, with nearly $250 billion in assets under management. It will write down the entirety of its $95 million investment in FTX.
That's quite a lot of money flowing into an organization that had an accounting firm in the metaverse, no board of directors, a questionable corporate domicile and was highly leveraged from the very beginning, among a list of other "red flags." So, what gives? Each of the VC funds that invested in FTX said it conducted an appropriate amount of due diligence. That includes Temasek Holdings, which stated it spent eight months of due diligence without identifying a single red flag.
While I'm not in a position to Monday-morning quarterback the VC/FTX bandwagoning, it's undeniable that serious questions are being raised by the SEC and others. Were the funds acting responsibly on behalf of their own investors when they poured money into FTX as part of their fiduciary duties? How is it possible that not one of FTX's investors noticed anything amiss? And is VC groupthink what led to all of this?
When it comes to FTX, (and many others, including Terraform Labs, Celsius Network, BlockFi, CoinDesk sister company Genesis, etc.) the stopgaps and oversight failed. We expect regulators to protect investors from fraud and mismanagement of their investment, while investors expect and rely on investment managers to do proper due diligence on investment and make risk-reward decisions as part of their fiduciary duty. This delicate balance of oversight, trust and accountability failed because, let's face it, FTX was the cool thing to invest in.
– Tal Elyashiv, co-founder and managing partner of SPiCE VC
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