Original Author: Leo Schwartz, Fortune Magazine
Original Compilation: Luffy, Foresight News
In 2022, when Yida Gao returned to the Massachusetts Institute of Technology, the former university pole vaulter and Phi Beta Kappa honor society member faced enormous challenges. The prestigious university had invited him to teach the graduate course in cryptocurrency and finance at the business school, a position previously held by the former chairman of the U.S. Securities and Exchange Commission, Gary Gensler.
Ten years after completing his undergraduate studies at MIT, this Chinese immigrant made it onto the Forbes 30 Under 30 list and has since made great strides in the cryptocurrency field. Yida Gao owns his own blockchain-focused venture capital firm, Shima Capital. Gao raised $200 million from financial heavyweights like Bill Ackman and prominent cryptocurrency companies such as Dragonfly and Galaxy, and has become one of the most active investors in the cryptocurrency field, with over 300 investment transactions.
Gao's rise has been meteoric, but his steps have not been steady. An investigation by Fortune magazine found that, without the knowledge of Ackman and other investors, Gao created a secret offshore entity and transferred assets belonging to Shima Capital to a new company established in his own name. "This directly violates the Investment Advisers Act," said Eric Hess, a lawyer specializing in digital assets and venture capital.
Gao has not faced any criminal charges, and a representative of Shima Capital told Fortune magazine that the company does not comment on "such regulatory matters." However, according to a source, Gao's poor performance and behavior seem to have violated the U.S. Securities and Exchange Commission's rules for investor protection, making it difficult for this former cryptocurrency rising star to raise more funds. Despite the booming market, a representative of Shima told Fortune magazine that the company has not currently raised any funds.
In recent months, Gao's company has experienced a wave of departures of senior staff, including Chief Technology Officer Carl Hua, Research Director Alexander Lin (who left Shima Capital earlier this year to start their own venture capital firm), and Platform Head Hazel Chen. The departing executives did not respond to requests for comment.
Despite the current favorable situation in the cryptocurrency market, Shima still seems to be struggling. The company's recent filing with the U.S. Securities and Exchange Commission (SEC) shows that its managed assets are approximately $158 million, a figure lower than the $200 million raised by Shima in 2022.
Although in the cryptocurrency field, corporate malfeasance is as common as impounded Lamborghinis, Gao has still managed to persuade a group of elite investors to support him and continue to be active in the field. His mistakes may become material for critics of the cryptocurrency industry, who have long condemned the industry for a large amount of improper behavior.
"There are many vulnerabilities in the cryptocurrency field," Hess said. "We need to start paying attention to them, not turning a blind eye, unless we are just the abandoned children of the financial system."
Scam
As one of the latest cryptocurrency prodigies, Gao has taken a more traditional path: clean-shaven, athletic, and with an impressive blue-chip institutional resume. His financial career began at Morgan Stanley, where he worked in mergers and acquisitions. In his spare time, he invested in startups and often collaborated with well-connected entrepreneur Adam Struck. Gao had worked at the venture capital giant New Enterprise Associates and briefly attended Stanford Business School before dropping out to join Struck full-time at their venture capital firm in Santa Monica.
Although the collaboration between Gao and Struck seemed to be thriving in the public eye, their private relationship became tense by 2019. Struck filed a lawsuit, accusing Gao of secretly stealing proprietary information and establishing a competing venture capital firm, Shima Capital, in Puerto Rico. Gao denied these allegations, arguing that Struck "diminished" his contributions and refused to acknowledge their equal partnership, leading to his solo entrepreneurship.
Struck has not responded to requests for comment on the legal dispute, which was resolved in October 2023.
Although the terms of the settlement agreement are sealed, Struck's lawyer alleged in court documents that Gao had set up multiple shell companies, including a wholly-owned entity called ShimaB in the British Virgin Islands.
Even during the dispute with Struck, Gao managed to persuade top figures in the cryptocurrency and financial industry, such as Bill Ackman and former presidential candidate Andrew Yang, to support him and raise funds from them. According to a timeline seen by Fortune magazine, Shima began trading in May 2021 and had invested approximately $100 million in about 200 projects by September 2022. However, not everyone was impressed by Gao's boyish charm.
Several investors, potential supporters, and potential portfolio companies told Fortune magazine that Gao and his team were young and inexperienced, and they did not truly understand what they were doing, merely riding the cryptocurrency wave.
The downsides of betting on Gao quickly became apparent. Notably, investors began to worry about how Gao's company evaluated its investments, sources told Fortune magazine, as Gao would increase Shima's stake based solely on his own ideas. An article in the Financial Times in 2023 pointed out that this was an unorthodox practice. Gao responded that Shima would soon hire professional fund managers to oversee the accounting work.
Another suspicious example of accounting work is a document seen by Fortune magazine dated September 2022, in which Shima valued its investment in the cryptocurrency exchange Chatex at $250,000, despite the U.S. Treasury Department having sanctioned the company nearly a year earlier for facilitating illegal activities such as ransomware and dark web markets.
According to The Block's report in July 2023, despite Gao's promise to find an auditor, Shima had difficulty finding one, as two well-known accounting firms rejected it because Shima exceeded their risk parameters.
A document submitted to the U.S. Securities and Exchange Commission in April 2024 shows that a company called MHA Cayman became Shima's auditor, and a representative of Shima confirmed that MHA completed Shima's 2023 audit in May 2024. MHA did not respond to multiple requests for comment from Fortune magazine.
Unreliable Strategy
In theory, Gao was selling standard products to investors. He took investors' money, invested in early-stage blockchain companies, provided exposure to this hot industry, and obtained astonishing growth potential.
The difficulties Shima encountered in finding an auditor are not common for a U.S. venture capital firm. It is also unusual for ShimaB, an overseas company, to be fully owned by Gao. While many U.S. cryptocurrency venture capital firms have set up offshore entities to cope with the uncertain regulatory environment at home, these entities are owned by the company, not by individuals operating the company.
Indeed, Gao did share a "fund structure" document with potential investors, outlining the distribution of limited liability companies under Shima, which would hold investor capital and make investments, with several registered in the Cayman Islands.
But other internal documents seen by Fortune magazine tell a different story. The ShimaB entity that Gao established in his own name during his collaboration with Struck did not appear in the fund structure document or in the prospectus shared with investors.
Meanwhile, other internal documents on Shima's ownership structure show that from mid-2021 to the end of 2022, over 100 investments were held by Gao's ShimaB after Shima announced the raising of $200 million.
While there is no evidence that Gao misappropriated assets through this operation, experts say that this behavior seriously violates the conflict of interest rules specified in the Investment Advisers Act, which clearly outlines the ethical obligations of venture capital firms to investors. In the case of ShimaB, the law seems to prohibit Gao from using investor funds to invest in entities he owns without proper disclosure.
In addition to basic transparency, the reason is also that if Gao were to have an accident, such as sudden death or bankruptcy, ownership of the investments could become contentious. "This makes no sense," said venture capital and blockchain lawyer Hess. "I don't think this is a reliable strategy."
Warning
At the end of 2022, Shima's investors began to notice issues with the ownership structure and valuation discrepancies, leading them to issue warnings to Shima's management. Galaxy redeemed its investment, while other small investors, including Bill Ackman's family office and Dragonfly, were not heavily involved in the dispute, likely due to their relatively small investments.
In March 2023, Gao attempted to alleviate concerns by meeting with Shima's small advisory committee and disclosed that the company had used ShimaB for "warehousing" investments (note: "warehousing" investments refer to investments made through a personally owned entity before delivery to a venture capital fund).
According to meeting records, Shima claimed to have invested with investor capital but had always intended to transfer it to the new company. In response to a series of questions from Fortune magazine, a representative of Shima reiterated that the company held investments through "related" entities such as ShimaB and transferred the investments to Shima's new fund.
However, the meeting minutes and the representative's response did not indicate that the company had disclosed the arrangement of ShimaB to its investors, nor did it reflect Gao transferring funds in his own name rather than through Shima. Additionally, due to many transfer restrictions on the investments, it is unclear whether Shima can transfer all investments back to the company.
In addition to investor dissatisfaction, Shima's compliance issues could also have legal implications for Gao and his company. Lawyer Hess stated that if Shima did not disclose suspicious operations during the review, this blatant conflict of interest violation could leave the U.S. Securities and Exchange Commission with some leverage. He added that the scope of enforcement penalties could include fines and even revocation of Shima's investment advisor qualifications.
Despite its tarnished record, Shima continues to actively engage in investment activities. Investors are flocking to the cryptocurrency market, and with the victory in the U.S. regulatory battle, meme coins like the popular Dogwifhat are also on the rise. In April, Shima became an investor in another dog-themed token, Shiba Inu, in a new blockchain.
Gao may not be an anomaly in the cryptocurrency field. However, for an industry trying to shake off its reputation for not playing by the rules, his actions serve as a warning for investors looking to avoid repeating past mistakes.
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