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

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

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Of the billions of dollars in customer deposits that gone of FTX in a flash, $200 million was used to fund investments in two companies, according to the Securities and Exchange Commission, which accused founder Sam Bankman-Fried with “the orchestration of a scheme to defraud equity investors”.

Through its FTX Ventures unit, the crypto firm in March invested $100 million in David, a fintech company that had gone public two months earlier through a special-purpose acquisition company. At the time of the deal, the companies said they would “work together to grow the digital asset ecosystem.”

The other deal the SEC appears to have referred to was a $100 million investment round in September to Mysten Labs, a Web3 company. In total it was 300 million dollars funding cycle which valued Mysten at $2 billion and included the stake of Coinbase Ventures, Binance Labs, and Andreessen Horowitz’s crypto fund.

While FTX Ventures made dozens of deals, according to PitchBook, Mysten Labs and Dave’s investments were the only two disclosed investments of $100 million, based on documents released by the Financial Times, which explains how the company put $5.2 billion to work. FTX Ventures was described as a $2 billion venture capital fund, in its press release with Dave.

Bankman-Fried, 30, is charged with commit widespread fraud after FTX, which was valued by private investors at $32 billion earlier this year, sank into bankruptcy in November. A central theme of the accusations is how Bankman-Fried diverted funds from FTX to its hedge fund, Alameda Research, which then used the money for risky trading and lending. FTX Ventures was reportedly part of this scheme.

Neither Mysten nor Dave have been linked to any alleged wrongdoing within Bankman-Fried’s empire. But the investments seems to be the first identified examples of customer money used by FTX and Bankman-Fried for venture capital funding. As FTX investigators and attorneys attempt to trace FTX’s cash outflows, these identified investments and others in the $5 billion venture capital pool will come under scrutiny.

By explicitly tying the two $100 million investments to client money, the SEC raised the possibility that they were prospects for recovery. If FTX’s trustees can establish that client money funded Bankman-Fried’s investments, they could pursue the recovery of those funds as part of an effort to recover client assets.

An SEC spokesperson declined to comment..

Dave CEO Jason Wilk told CNBC that FTX’s investment in Dave is already expected to be repaid, with interest, by 2026. FTX’s $100 million investment consisted of a convertible note, a short-term cash loan that FTX could convert to stock at a later date. Date. That conversion was never made, leaving Dave with a liability of $101.6 million, including interest, to FTX and any successor company, according to tthe company’s most recent SEC filings.

Jason Wilck

Source: Jason Wilk

“The note issued to FTX is due for redemption in March 2026,” the company said in a statement. “No condition in the note triggers a present obligation on Dave to repay by the due date.”

Wilk added that “it is important to clarify that we were not aware that FTX or Alameda were using client assets to make investments.”

Bankman-Fried’s investment in Mysten Labs was an equity deal. Because Mysten is a private company, there is no clearly defined process in the US bankruptcy code to recover these funds.

Mysten declined to comment. Attorneys for Sullivan & Cromwell, which represents FTX, did not respond to requests for comment.

One Complaint to the SEC filed against two of Bankman-Fried’s lieutenants, Caroline Ellison and Gary Wang, clarified that “two $100 million investments made by FTX’s affiliate investment vehicle, FTX Ventures Ltd., were funded with funds from FTX customers who had been diverted to Alameda”.

Regardless of the money used, FTX’s investments were mistimed.

Shares of Dave have fallen more than 97% since the company went public, mirroring the performance of SPAC’s broader basket, which has plunged this year. In July, the Nasdaq warned Dave that if its stock price did not improve, it risked being delisted. The stock is currently trading at 28 cents and the market capitalization is around $100 million.

Alameda Research previously invested $15 million in Dave in August 2021, prior to the Nasdaq listing. Dave was founded in 2016 and offers its customers a free cash advance on their future income through a range of banking products. Mark Cuban led a $3 million seed round in 2017.

The investment could have been lucrative for FTX had Dave’s stock price improved past $10 per share, allowing FTX to convert at a profit.

FTX’s investment in Mysten came amid a crypto meltdown. Bitcoin and ether fell by more than half for the year and many hedge funds and lenders went bankrupt.

The funds were to be used in Mysten’s efforts to “build a blockchain that scales with demand and incentivizes growth,” Mysten CEO Evan Cheng said at the time.

Representatives for Ellison and Wang did not respond to requests for comment. A Bankman-Fried representative declined to comment.

Ellison, 28, and Wang, 29, pleaded guilty in New York last week Federal charges for unlawful use of client funds for business purposes and risky investments, allegedly made by Bankman-Fried. The two cooperate with federal investigations into Bankman-Fried and the collapse of FTX.

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