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The lawyer doubted the due examination of investments in FTX

Investors in the bankrupt FTX exchange ignored the warning signals contained directly in the presentations for the rounds. This conclusion was made by the partner of Simmons & Simmons George Morris, reports The Block.

The list of large investment firms affected by the collapse of the crypto company is growing. The day before FTX and its affiliates filed for insolvency, Sequoia Capital marked the $213.5 investment “nullified.”

On Nov. 17, Singapore-based Temasek Holdings announced that it had written off $275 million in investments in the exchange and its US subsidiary.

At the request of the publication, Morris studied the FTX presentations for investment rounds. According to the lawyer, forward-looking statements in them are not supported by “viable assumptions.”

The expert drew attention to the discrepancy between the declared revenues for 2021 and 2022 and the planned indicators of trade volumes and fees. In his opinion, these figures are “definitely not connected in any way.”

Morris also pointed to cost projections that include rent, salaries and marketing. In a Series B presentation, the company valued them at $7.65 million for all of 2022. The expert noted that this is approximately the same as for a firm with 100 employees, and FTX stated the number of employees at about 300 people.

The exchange indicated the forecast for net profit at $327 million.

“The costs that underpin these returns look undervalued,” Morris said.

He also highlighted two other points: the lack of regulatory clarity in FTX’s announcement and the hasty nature of the fundraising.

The lawyer believes that the first point was especially noteworthy for investors, since the exchange announced in the presentation that it was actively offering derivatives to retail investors. Such products are subject to strict regulation in the US, he recalled.

“It’s worth noting that the round’s schedule was extremely short — the booklet was released after February 6, 2020, proposals were accepted until February 20, and closing was on the last day of the month,” Morris said.

Such a schedule leaves “little chance of a proper due diligence”emphasized the lawyer.

Due to the outbreak of the COVID-19 pandemic, the exchange completed its Series B funding round only in July 2021, raising $900 million. The initial presentation was about $50 million.

Andrey Brasoveanu, a partner at venture capital firm Accel, noted in a commentary for The Block that, against the backdrop of a bullish rally, the investment market in crypto startups was then “super-transactional”. According to him, those wishing to invest in the industry were constantly in the “catching up” mode.

The former head of the venture division of FTX, Amy Wu, previously noted that often the terms of the deal were then agreed within a day.

Recall that the managing partner of the investment company Hack VC, Alexander Pak, spoke about the “catastrophic” risk appetite of FTX founder Sam Bankman-Fried.

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