Lawyer questions the adequacy of FTX investment due diligence

Investors in the bankrupt FTX ignored warning signals embedded directly in the round deck presentations. This conclusion was reached by Simmons & Simmons partner George Morris, reports The Block.

The list of major investment firms that suffered from the crypto firm\’s collapse is growing. One day before FTX and affiliated structures insolvency filings, Sequoia Capital marked ‘written off’ investments of $213.5 million.

On November 17, Temasek Holdings of Singapore announced that written off investments in the exchange and its US subsidiary worth $275 million.

At the publication\’s request, Morris studied FTX\’s presentations for funding rounds. In the lawyer\’s view, the forecast statements in them were not backed by viable assumptions.

The expert pointed to a mismatch between claimed revenues for 2021 and 2022 and the projected trading volumes and fees. In his view, the figures are definitely not related to the projected trading volumes and fees.

Morris also highlighted cost projections, including rent, salaries and marketing. In the Series B deck, the company priced them at $7.65 million for the full year 2022. He noted that this roughly corresponds to a firm of about 100 employees, whereas FTX said its headcount was around 300.

The exchange projected net income of $327 million.

«The costs underpinning such profitability appear undervalued,» Morris says.

He also highlighted two more points: the lack of regulatory clarity in FTX\’s statements and the hurried nature of fundraising.

The lawyer argues that the first point warranted particular investor attention, given that the exchange\’s presentation claimed an active retail offering of derivatives. Such products are tightly regulated in the United States, he noted.

«It\’s worth noting that the round\’s timetable was extremely tight — the deck was issued after February 6, 2020, bids were accepted until February 20, and the close was on the last day of the month,» Morris said.

Such a timetable leaves little chance to properly conduct due diligence, the lawyer noted.

Due to the COVID-19 outbreak, the exchange completed the Series B financing round only in July 2021, raised $900 million. The initial presentation spoke of $50 million.

Accel partner Andrey Brasovyanu told The Block that, against the backdrop of a bull market for crypto startups, the market for crypto-startup investments was “hyper-transactional.” In his words, those seeking to invest in the industry were constantly in a state of “catch-up.”

Former head of FTX\’s venture arm Amy Wu previously noted that deal terms were often agreed within a day.

Earlier, Hack VC managing partner Alexander Pak described the founder\’s “catastrophic” risk appetite.

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