Investors in crypto exchange FTX are facing regulatory probes into their due diligence processes after pumping millions into the firm before it spectacularly collapsed in early November.
FTX, founded by disgraced former billionaire Sam Bankman-Fried, had been valued at $32bn prior to its collapse and won hefty backing from a host of big name backers including Japanese investment giant SoftBank, venture giant Sequoia capital and the Ontario Teachers Pension Plan.
However, court filings since its collapse allege that FTX lacked financial controls and dished out billions of pounds of customers’ cash to its sister trading firm Alameda, raising questions over the level of due diligence conducted by some of the world’s biggest investors.
The US Securities and Exchange Commission is now reportedly probing FTX investors to determine why they chose to back the stricken exchange and what processes were followed before making the decision, Reuters reported, citing sources close to the discussions.
It is not yet clear which regulators are facing enquiries, the sources said.
Initial troubles at FTX prior to its bankruptcy sparked a string of statements from investors announcing they had written their multi-million dollar stakes in the firm down to zero. The episode has left major question marks hanging over the scrutiny venture capital firms subject companies to before making investment decisions.
The probes into the firms that backed FTX would look to determine whether the firms had met their fiduciary duties to investors, the sources said.
The move marks the latest swoop from authorities in an episode that has shaken the crypto sector.
FTX founder Sam Bankman-Fried pled not guilty to charges from US prosecutors this week, setting up one of the most high-profile white collar crime trials ever. Two other top FTX and Alameda executives, Gary Wang and Caroline Ellison, have already pled guilty to charges and are cooperating with authorities.
The fallout of the crisis has sparked contagion risk across the sector as investors flee for steadier ground.
Crypto-focused lender Silvergate was the latest firm to be rocked by the crisis as it announced yesterday that it was forced to sell $5.2bn worth of its assets to raise emergency cash after a run from depositors.
The firm said it had sold off the assets “in order to accommodate sustained lower deposit levels and to maintain a highly liquid balance sheet”, booking a heavy loss of $718m.