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Frankly, it seems to me that VCs should be liable for money FTX owes its customers. These are professional investors who didn't insist on very basic things, suc

Frankly, it seems to me that VCs should be liable for money FTX owes its customers. These are professional investors who didn't insist on very basic things, such as proper financial sheets from a finance company. Frankly, that's gross negligence. Professional investors should have legal responsibility to do at least some due diligence. In addition, they're becoming owners of a company. As owners, why shouldn't they be exposed to liability that could have been prevented with some basic due diligence?

pavlov 4y ago
I agree! For VCs, crypto has been a “Heads we win, tails you lose” proposition. Normally it takes 3-10 years for a VC investment to reach an exit. In crypto, they get tokens that they’ve been able to dump to retail almost immediately. A16Z has a particularly suspicious shitcoin pipeline via their Coinbase board seat. I hope SEC also ends up prosecuting investors who participated in these token offerings, and ideally also employees who got paid in tokens [1]. But I have no idea if there’s a legal basis because American securities law is designed to protect investors and doesn’t necessarily seem to account for the A16Z-style case where they’re essentially co-conspirators in the fraud: supplying crypto founders with money for marketing which pulled in retail dollars which ended up straight back to the VC’s and founders’ pockets. [1] What difference does it really make if you’re a founder selling unlicensed securities, or an employee who signed a contract where you get paid in those unlicensed securities and then you dump them on retail investors? The SEC should look at these schemes which were popular with companies that hire on HN too.
- LarryMullins 4y ago
  > I hope SEC also ends up prosecuting [...] employees who got paid in tokens Prosecuting those rubes for being among the victims? If there is evidence they pumped and dumped those tokens or didn't report their income correctly, then sure. But otherwise, why prosecute people for being stupid enough to accept payment crypto?
phphphphp 4y ago
Setting aside the arguments to be made for/against the idea, and focusing on the implementation instead: most investments are handled through some sort of limited liability vehicle and so even if the “investor” was held responsible it would not necessarily impact the human(s) that stood to gain.
- zeroonetwothree 4y ago
  I suppose we need some criminal law in that case.
  - beefield 4y ago
    At a minimum, tax code should be changed to discourage limited liability corporation forms. Personally I'd also like to see that limited liability as a concept would be forbidden in many/most industries/cases. In Brazil the management and owners of a bank may be held liable if bank fails even without wrongdoing. And I think there has not been many failing banks in Brazil... https://www.economist.com/finance-and-economics/2013/05/04/blind-justice https://www.economist.com/finance-and-economics/2013/05/04/b... (Paywall, check google cache)
jacquesm 4y ago
You are correct, insofar as we're not talking about the LPs of those funds, but the managers.
el_nahual 4y ago
Often VCs will have a seat on the company's board--in which case they might be liable. However, it doesn't seem that Sequoia et al had seats on the board, at least from this early 2022 press release [1]. Holding shareholders that are not directors accountable is extremely difficult. This is called "piercing the corporate veil" (worth a google) and is done only vary rarely and in cases of clear and outrageous misconduct attributable to the shareholders themselves—it's so rare because it's antithetical to the entire premise of the "limited" corporation. [1] https://www.prnewswire.com/news-releases/ftx-us-derivatives-announces-board-of-directors-301463938.html https://www.prnewswire.com/news-releases/ftx-us-derivatives-...
- gergov 4y ago
  Which makes it even more interesting. One of the most head scratching pieces of this puzzle that SBF got truckloads of VC money with laughable fundraising rounds + no board seats. It didn't make any rational sense. Unless the logical conclusion is that it means 'zero liability'.

pavlov 4y ago

I agree! For VCs, crypto has been a “Heads we win, tails you lose” proposition. Normally it takes 3-10 years for a VC investment to reach an exit. In crypto, they get tokens that they’ve been able to dump to retail almost immediately. A16Z has a particularly suspicious shitcoin pipeline via their Coinbase board seat. I hope SEC also ends up prosecuting investors who participated in these token offerings, and ideally also employees who got paid in tokens [1]. But I have no idea if there’s a legal basis because American securities law is designed to protect investors and doesn’t necessarily seem to account for the A16Z-style case where they’re essentially co-conspirators in the fraud: supplying crypto founders with money for marketing which pulled in retail dollars which ended up straight back to the VC’s and founders’ pockets. [1] What difference does it really make if you’re a founder selling unlicensed securities, or an employee who signed a contract where you get paid in those unlicensed securities and then you dump them on retail investors? The SEC should look at these schemes which were popular with companies that hire on HN too.

LarryMullins 4y ago
> I hope SEC also ends up prosecuting [...] employees who got paid in tokens Prosecuting those rubes for being among the victims? If there is evidence they pumped and dumped those tokens or didn't report their income correctly, then sure. But otherwise, why prosecute people for being stupid enough to accept payment crypto?

phphphphp 4y ago

Setting aside the arguments to be made for/against the idea, and focusing on the implementation instead: most investments are handled through some sort of limited liability vehicle and so even if the “investor” was held responsible it would not necessarily impact the human(s) that stood to gain.

zeroonetwothree 4y ago
I suppose we need some criminal law in that case.
- beefield 4y ago
  At a minimum, tax code should be changed to discourage limited liability corporation forms. Personally I'd also like to see that limited liability as a concept would be forbidden in many/most industries/cases. In Brazil the management and owners of a bank may be held liable if bank fails even without wrongdoing. And I think there has not been many failing banks in Brazil... https://www.economist.com/finance-and-economics/2013/05/04/blind-justice https://www.economist.com/finance-and-economics/2013/05/04/b... (Paywall, check google cache)

jacquesm 4y ago

You are correct, insofar as we're not talking about the LPs of those funds, but the managers.

el_nahual 4y ago

Often VCs will have a seat on the company's board--in which case they might be liable. However, it doesn't seem that Sequoia et al had seats on the board, at least from this early 2022 press release [1]. Holding shareholders that are not directors accountable is extremely difficult. This is called "piercing the corporate veil" (worth a google) and is done only vary rarely and in cases of clear and outrageous misconduct attributable to the shareholders themselves—it's so rare because it's antithetical to the entire premise of the "limited" corporation. [1] https://www.prnewswire.com/news-releases/ftx-us-derivatives-announces-board-of-directors-301463938.html https://www.prnewswire.com/news-releases/ftx-us-derivatives-...

gergov 4y ago
Which makes it even more interesting. One of the most head scratching pieces of this puzzle that SBF got truckloads of VC money with laughable fundraising rounds + no board seats. It didn't make any rational sense. Unless the logical conclusion is that it means 'zero liability'.