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The cryptocurrency wunderkind’s $200 million fund had backing from investors including Bill Ackman and Galaxy. Then everything went south
Hi, I’m Leo Schwartz filling in for Allie.
Stop me if you’ve heard this story before. A cryptocurrency wunderkind rises through the ranks of blue-chip institutions, with credentials from MIT, Morgan Stanley and Forbes’ 30 under 30 list. He gains the trust and support of major investors in the field of finance and cryptocurrencies, from Bill Ackman to the Galaxy company. But just beneath the surface are problems and serious legal implications.
No, this isn’t Sam Bankman-Fried, or Do Kwon, or Kyle Davies and Su Zhu, although I recognize that this beat is starting to sound like a broken record. Instead, I have a new investigation into Yida Gao, who just a couple of years ago was a rising blockchain star. His firm, Shima Capital, has raised $200 million in its debut fund, backed by some of the biggest names in the industry. Gao quickly became one of the most active investors in the space and even taught a course on cryptocurrencies at MIT’s business school, filling a position vacated by SEC Chairman Gary Gensler.
Behind the scenes, however, Gao appears to have cut some crucial corners while running his fund, alienating his investors and perhaps running afoul of key SEC rules. In the starkest example, Fortune’s investigation revealed that Gao funneled investments into a secretive offshore entity that he wholly owned without disclosing the deal to investors — a potential violation of the Investment Advisers Act, according to experts with whom I spoke. “It doesn’t make any sense,” Eric Hess, a venture and blockchain lawyer, told me. “I don’t think that’s a defensible strategy.”
Gao doesn’t just have the SEC to worry about. Shima has also alienated supporters, with cryptocurrency firm Galaxy redeeming his investment and others raising alarm bells. According to a source, Shima has struggled to raise additional capital due to concerns about its performance and his behavior, and a representative confirmed that the company is not currently raising funds, despite the red-hot cryptocurrency market.
It should come as no surprise that compliance is still a struggle for crypto companies. In the US the industry still lacks clear regulation, and most major venture funds that want to participate in blockchain deals have to set up a network of offshore entities. But this should not mean violating the law or fundamental investor protection principles.
While there is no evidence that Gao and Shima set out to misappropriate funds, their actions are at best reckless and at worst could result in serious legal penalties. It’s an all-too-common story in the cryptocurrency industry, which seems to replicate the same missteps with every cycle.
“There’s a lot of softness around the edges, sometimes a lot of ‘Trust me, brother,’” Hess told me. “We need to start paying attention to these standards and not pretend that we are not just the abandoned children of the financial system.”
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Leo Schwartz
Twitter: @leomschwartz
E-mail: leo.schwartz@fortune.com
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This story was originally featured on Fortune.com