Raised $ 420 million, $ 300 million into Sam Bankman-Fried’s pocket

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2022-11-22 21:21:44

The money raised from investors was claimed by FTX to be used to develop the business, but three-quarters of it went to Sam Bankman-Fried’s pocket.

When FTX raised $420 million from a host of big-name investors last October, the crypto exchange said the money would help grow the business, improve the user experience, and allow the company to grow. allowing them to connect more with regulators.

What was not mentioned, however, was that nearly three-quarters of the money, or about $300 million, went instead to FTX founder Sam Bankman-Fried, who sold a portion of his personal shares. in company. This information has just been learned by the WSJ through FTX’s financial records.

By standards in the start-up world, the cash out of Bankman-Fried is large. In fact, such acquisitions have historically been taboo because they allowed founders to gain unauthorized profits from investors. Bankman-Fried told investors at the time that it was a partial refund of what he had spent buying a stake in rival Binance in FTX a few months earlier, according to several people familiar with the matter. with transaction.

The deal provides a glimpse into the money spiral between Bankman-Fried and the many institutions he controls at a time when the crypto business has flourished. There seems to be an amount of money to help fund a slew of political donations, philanthropic pledges, and large stock purchases over the past year.

That spiral is now under scrutiny in the lengthy bankruptcy of FTX and Alameda Research LLC, Bankman-Fried’s crypto hedge fund. The CEO of Alameda and FTX said that FTX has lent money to Alameda customers and they face a financial shortfall of about $8 billion.

John Ray, the new FTX chief executive appointed to oversee the bankruptcy, said in a court filing Thursday that the process will involve a “comprehensive, transparent investigation.” and intentional claims against Samuel Bankman-Fried” and other co-founders of the companies involved.

The filing highlights many flaws, including “the concentration of control in the hands of a very small group of inexperienced individuals.”

The October 2021 sale of Bankman-Fried stock came amid a six-month flash capital raising that ultimately raised about $2 billion from investors including Sequoia Capital, a fund run by BlackRock Inc. . Singapore Temasek Asset Management and Management Fund.

The October 2021 funding round valued the company at $25 billion. In a press release, Bankman-Fried said he is pleased to “work with investors who prioritize positioning FTX as the world’s most transparent and compliant cryptocurrency exchange.”

The amount raised was about $420.69 million, from 69 investors. An article published by one of FTX’s investors, Sequoia fund, called the fundraising a “meme spin,” referring to the pranks and scams embedded.

Three months earlier, in July 2021, Bankman-Fried acquired about 15% of the shares owned by Binance, FTX’s first outside investor. Binance CEO Changpeng Zhao tweeted this month that the sum totaled $2.1 billion, paid out in a combination of FTT, FTX’s own token, and BUSD, Binance’s stablecoin, with a pegged value. in US dollars.

It is not known where Bankman-Fried got the money to buy Binance shares. Bankman-Fried said at the time that cryptocurrencies were booming and Alameda was highly profitable. Those financials were questioned this week from CEO Ray, who said earlier numbers were unreliable and Alameda had not been audited.

Following the sale in July 2021, the FTX shares previously owned by Binance went to Paper Bird Inc., according to FTX documents. Paper Bird is a 100% Bankman-Fried entity, according to FTX documents filed with Miami-Dade County, in Florida.

Shortly after Bankman-Fried acquired a stake in Binance, he publicly spoke about the differences in the way he and Zhao run the business and their approach to regulators.

It is not clear what Bankman-Fried did with the $300 million and whether the funds were returned to FTX or kept separately. FTX’s 2021 audited financial statements said the money was withheld by the company for “operating means” on behalf of a “related party”.

FTX returned to investors for more money in January 2022, when it raised another $400 million.

In general, venture capitalists are not satisfied with the fact that founders sell shares in large numbers before the company’s IPO. The reason is because they don’t like the idea of ​​a founder putting little or no money into a business to get rich before investors can cash out.

But in the frenzied years of investing in startups over the past decade, venture capitalists say, the practice has become more common as investors lower their standards for investing. promote transactions.

Startups whose founders sold large amounts of private stock before their tumultuous public-market debut include WeWork Inc., Groupon Inc. and Zynga Inc.

Such a sale is usually approved by a board of directors, where venture capitalists typically have one or more seats. However, FTX’s board of directors had only three directors earlier this year: Bankman-Fried, an employee of FTX, and an Antigua lawyer… specializing in gaming.

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