Hello, Leo Schwartz is replacing Allie here.
Stop me if you’ve heard this story before. A crypto kid prodigy with credentials from MIT, Morgan Stanley, and Forbes’ 30 under 30 list is rising through the ranks of world-class institutions. It has the trust and support of leading investors in finance and crypto, from Bill Ackman to Galaxy firm. But problems and serious legal consequences loom just beneath the surface.
No, this isn’t Sam Bankman-Fried, Do Kwon, or Kyle Davies and Su Zhu, but I admit this beat is starting to sound like a broken record. Instead, I have a new investigation into Yida Gao, who was a rising star in blockchain just a few years ago. His firm, Shima Capital, has raised $200 million in its first fund with backing from some of the industry’s biggest names. Gao quickly became one of the most active investors in the space, even teaching a course on crypto at MIT’s business school, filling the position vacated by SEC Chairman Gary Gensler.
But behind the scenes, Gao appears to have sidestepped some key issues in running his fund, alienating his investors and possibly running afoul of important SEC rules. In the most prominent example, Fortune’s investigation found that Gao transferred his investments to a secretive offshore entity that he wholly owned without disclosing the deal to investors; This is a possible violation of the Investment Advisers Act, according to experts I spoke with. “This makes no sense,” startup and blockchain lawyer Eric Hess told me. “I don’t think that’s a defensible strategy.”
Gao doesn’t just have to worry about the SEC. Shima also alienated supporters, with crypto firm Galaxy withdrawing its investment and others raising alarm bells. According to a source, Shima has struggled to raise more capital due to concerns about his performance and behavior, and a representative confirmed that the firm is not currently raising funds despite the extremely hot crypto market.
It should come as no surprise that compliance is still a struggle for crypto firms. The industry still lacks clear regulation in the US, and most mainstream venture funds looking to participate in blockchain deals must set up a network of offshore entities. However, this should not mean disregarding the law or basic investor protection principles.
While there is no evidence that Gao and Shima attempted to misappropriate funds, their actions are careless at best and could result in serious legal penalties at worst. This is a story that is all too common in the crypto industry, repeating the same missteps cycle after cycle.
“There’s a lot of softness in the corners, sometimes a lot of ‘Trust me, bro,'” Hess told me. “We need to start paying attention to those standards and not faking it unless we’re the unclaimed children of the financial system.”
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Leo Schwartz
Twitter: @leomschwartz
Email: [email protected]
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This story first appeared on Fortune.com