WSJ Exclusive News |  FTX's Sam Bankman-Fried pulls in $300 million amid funding frenzy

When FTX raised $420 million from a number of high-profile investors last October, the cryptocurrency exchange said the money would help grow the business, improve user experience and allow it to engage more with regulators.

Unmentioned is that nearly three-quarters of the money, $300 million, instead went to FTX founder Sam Bankman-Fried, who sold some of his personal stake in the company, according to FTX financial records reviewed by The Wall Street Journal and people familiar with the deal.

Mr. Bankman-Fried’s payout was large by the standards of the startup world, where such sales have historically been taboo because they allowed founders to extract profits before investors. Mr. Bankman-Fried told investors at the time that it was a partial refund of the money he spent to buy out rival Binance’s stake in FTX a few months earlier, according to some of the people familiar with the transaction.

The deal offers a glimpse into the flow of money between Mr Bankman-Fried and a host of entities he controlled as his crypto business flourished, a flow of funding that helped finance a surge in political donationsphilanthropic commitments and big buy of Robinhood Markets Inc. availability in the past year.

That maelstrom is now under scrutiny in the unfolding bankruptcy of FTX and Alameda Research LLC, Mr. Bankman-Fried’s crypto hedge fund. FTX which borrows Alameda customer fundsfaces an estimated $8 billion funding shortfall, Alameda and FTX executives said.

John Ray, the new FTX chief executive appointed to oversee the bankruptcy, said in a court filing Thursday that the process would include a “comprehensive, transparent and deliberate investigation of claims against Mr. Samuel Bankman-Fried” and other co-founders of the businesses.

The filing highlighted numerous flaws, including “the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals”.

Cryptocurrency exchange FTX was considered a survivor in a struggling industry, but for six days the exchange collapsed due to a sudden collapse in liquidity. The WSJ explains the factors that led to FTX’s rise and what led to its fall. Illustration: Alexandra Larkin

Mr. Bankman-Fried’s October 2021 share sale came amid a six-month fundraising blitz that ultimately brought in roughly $2 billion from investors including Sequoia Capital, funds managed by BlackRock Inc. and Singapore’s sovereign wealth fund Temasek.

October 2021 the fundraising valued the company at $25 billion. In a press release, Mr. Bankman-Fried said he was happy “to partner with investors who prioritize positioning FTX as the world’s most transparent and compliant cryptocurrency exchange.”

The amount raised contained numerical references to marijuana and oral sex: $420.69 million raised from 69 investors. An article published by one of FTX’s investors, Sequoia, called this fundraiser a “meme round,” referring to the in-jokes.

Three months earlier, in July 2021, Mr. Bankman-Fried bought out the roughly 15% stake held by Binance, FTX’s first outside investor. Binance CEO Changpeng Zhao tweeted this month that the amount amounted to 2.1 billion dollarspaid in a combination of FTT, FTX’s internal crypto currency, and BUSD, Binance’s stablecoin whose value is pegged to the US dollar.

It could not be learned where Mr. Bankman-Fried got the money for the Binance stake. At the time, crypto was booming and Alameda was very profitable, Mr. Bankman-Fried said. Those finances were questioned this week by Mr. Ray, who said previous numbers were unreliable and Alameda had no audited financials.

After the sale in July 2021, the FTX shares that Binance previously owned ended up in Paper Bird Inc., according to FTX filings. Paper Bird is an entity wholly owned by Mr. Bankman-Fried, according to FTX documents filed in Miami-Dade County, Florida.

Changpeng Zhao, CEO of Binance, the first outside investor in FTX, tweeted that Binance’s 15% stake in FTX was sold last year for approximately $2.1 billion.


photo:

Juliana Tan for The Wall Street Journal

Soon after Mr. Bankman-Fried bought out the Binance stake, he spoke publicly about the differences in how he and Mr. Zhao run their businesses and their approaches to regulators.

It could not be determined what Mr. Bankman-Fried did with the $300 million and whether the money was returned to FTX or held separately. FTX’s 2021 audited financial statements reviewed by the Journal said the money was withheld by the company for “operational expediency” on behalf of “related party.

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

In general, venture capitalists frown on large sales of stock by founders before the company goes public, in part because they don’t like the idea of ​​a founder who puts little or no money into a business getting rich before investors can cash out.

But during the frenzy of startup investing over the past decade, the practice became more common, venture capitalists say, as investors lowered their standards to make their way to deals.

“It’s just not a good sign,” said Charles Elson, a professor at the University of Delaware who studies corporate governance. This shows that the founder of the company thinks there is a better place to invest. “Anytime you see a founder selling stock in a secondary offering, you really have to ask them some pretty tough questions,” he said.

Startups where founders sold significant chunks of private equity before rocky public market debuts include We are working Inc., Groupon Inc. and Zynga Inc.

Such sales are usually approved by a board of directors, where venture capital investors typically have one or more seats. The FTX board, however, there were only three directors from earlier this year: Mr. Bankman-Fried, an FTX employee and attorney from Antigua who specializes in gaming.

— Peter Rudegeair contributed to this article.

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