FTX used $200 million of customer funds for two venture investments

FTX founder Sam Bankman-Fried leaves following his arraignment in New York City on December 22, 2022.

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Of the billions of {dollars} in customer deposits that disappeared from FTX in a flash, $200 million was used to fund investments in two firms, in accordance with the Securities and Exchange Commission, which charged founder Sam Bankman-Fried with “orchestrating a scheme to defraud equity investors.”

Through its FTX Ventures unit, the crypto agency in March invested $100 million in Dave, a fintech company that had gone public two months earlier by a particular objective acquisition company. At the time, the businesses mentioned they might “work together to expand the digital assets ecosystem.”

The different deal the SEC seems to have referenced was a $100 million funding spherical in September for Mysten Labs, a Web3 company. In complete, it was a $300 million funding round that valued Mysten at $2 billion and included participation from Coinbase Ventures, Binance Labs and Andreessen Horowitz’s crypto fund.

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While FTX Ventures has carried out dozens of transactions, in accordance with PitchBook, the Mysten Labs and Dave investments have been the one two disclosed investments of $100 million, primarily based on paperwork printed by the Financial Times, which broke down how the company put $5.2 billion to work. FTX Ventures was described as a $2 billion venture fund, in its press launch with Dave.

Bankman-Fried, 30, stands accused of committing widespread fraud after FTX, which was valued by personal traders at $32 billion earlier this year, sank out of business in November. A central theme within the costs is how Bankman-Fried diverted funds from FTX to his hedge fund, Alameda Research, which then used that money for dangerous trades and loans. FTX Ventures was allegedly half of that scheme.

Neither Mysten nor Dave have been linked to any alleged wrongdoing inside Bankman-Fried’s empire. But the investments seem like the primary recognized examples of customer money being used by FTX and Bankman-Fried for venture funding. As investigators and FTX legal professionals try and retrace the outflow of FTX funds, these recognized investments and others within the $5 billion venture pool will entice heavy scrutiny.

In explicitly linking the two $100 million investments to customer money, the SEC has raised the likelihood that they will be prospects for clawbacks. If FTX chapter trustees can set up that shopper money funded Bankman-Fried’s investments, they may pursue recovery of these funds as half of an effort to retrieve customer belongings.

A spokesperson for the SEC declined to remark.

Dave CEO Jason Wilk informed CNBC that FTX’s funding in Dave is already scheduled to be repaid, with curiosity, by 2026. FTX’s $100 million funding was by a convertible notice, a short-term mortgage of money that FTX may convert into shares at a later date. That conversion was by no means made, leaving Dave with a $101.6 million legal responsibility, together with curiosity, to FTX and any successor firms, in accordance with the company’s most recent SEC filings.

Jason Wilk

Source: Jason Wilk

“The note issued to FTX is due for repayment in March 2026,” the company mentioned in an announcement. “No terms contained in the note trigger any current obligation by Dave to repay prior to the maturity date.”

Wilk added that, “it is important to state we had no knowledge of FTX or Alameda using customer assets to make investments.”

Bankman-Fried’s funding in Mysten Labs was an fairness deal. Because Mysten is a privately held company, there is not any clearly outlined course of in U.S. chapter code for clawing again these funds.

Mysten declined to remark. Lawyers at Sullivan & Cromwell, which represents FTX, didn’t reply to requests for remark.

An SEC complaint filed in opposition to two of Bankman-Fried’s lieutenants, Caroline Ellison and Gary Wang, specified that “two $100 million investments made by FTX’s affiliated investment vehicle, FTX Ventures Ltd., were funded with FTX customer funds that had been diverted to Alameda.”

Irrespective of what money was being used, FTX’s investments have been ill-timed.

Dave shares have plummeted over 97% because the company went public, mirroring the efficiency of the broader basket of SPACs. In July, the Nasdaq warned Dave that if its share worth did not enhance, it was in danger of being delisted. The stock presently trades for 28 cents and the market cap sits at round $100 million.

Alameda Research had beforehand made a $15 million funding in Dave in August 2021, earlier than the Nasdaq itemizing. Dave was based in 2016 and gives clients a free money advance on their future earnings as half of a suite of banking merchandise. Mark Cuban led a $3 million seed spherical in 2017.

The funding may have been profitable for FTX if Dave’s share worth had improved past $10 a share, permitting FTX to transform at a revenue.

FTX’s funding in Mysten got here within the midst of a crypto meltdown. Bitcoin and ether have been down by greater than half for the year and quite a few hedge funds and lenders had gone bankrupt.

The funds have been to be used in Mysten’s effort to “build a blockchain that scales with demand and incentivizes growth,” Mysten CEO Evan Cheng mentioned on the time.

Representatives for Ellison and Wang didn’t reply to requests for remark. A consultant for Bankman-Fried declined to remark.

Ellison, 28, and Wang, 29, pleaded responsible in New York final week to federal costs over the illicit use of customer funds for buying and selling and venture investments, allegedly directed by Bankman-Fried. Both are cooperating with federal investigations into Bankman-Fried and the collapse of FTX.

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