Crypto-related Hedge Funds Beware; SEC Upping the Ante in Rooting Out Bad Actors

The U.S. SEC sees opportunities for fraud in crypto-related hedge funds, and it is reportedly looking into their business practices.

The U.S. Securities and Exchange Commission continues to show that the ante has been upped as far as its determination to hunt down bad actors in the cryptocurrency space.

Its latest effort focuses on crypto-related hedge funds.

Quoting several anonymous sources, Bloomberg reported this week that the SEC is looking at the business operations of funds set up to invest in cryptos. This effort comes on the heels of the SEC sending out scores of subpoenas ICO founders.

Let’s discuss.

ICOs continue to face regulatory investigation

It is estimated that there are more than 200 crypto-related funds.  Bloomberg noted that three sources had given it information on how the SEC is reviewing them. The financial media outlet reported:

Since hedge funds manage money for outside investors, the SEC wants to make sure firms are appropriately valuing holdings and keeping clients’ assets safe.

The risk of fraud

One of the things that irk U.S. lawmakers the most about the space was addressed this week when several experts in the crypto space visited Capitol Hill. This concern relates to the vulnerability of investors who sink their dollars into cryptos and ICOs without truly knowing the legitimacy of these outfits.

One of those experts was Dr. Chris Brummer, a law professor at Georgetown University. He told members of the U.S. House of Representatives’ Financial Services Committee that a major problem with ICOs related to the white papers. Often, these documents have very little information to identify the actual players on the deal. This includes their addresses or even clear details about how they plan to use the proceeds from their ICOs.

Then there is the matter of these ICO organizers not being properly registered so that if they are fraudulent, the SEC has few ways to catch them. Bloomberg noted that one of its sources pointed to an agreement that startups wishing to raise capital have to enter into with the SEC.

Called SAFT for Simple Agreement for Future Tokens, the problem is that some outfits use these agreements to try to avoid having to register their ICOs with the SEC.

Who’s behind these hedge funds?

There are some reputable names behind some of the hedge funds. Take, for example, billionaire tech investor Marc Andreessen. He’s a major investor in Multicoin Capital, which was launched in October of last year. It has a goal to raise $250 million by the end of the year.

Based in Texas, the fund originally was set to raise $100 million. However, new heavyweight investors like Andreesen, as well money from Blocktower and Craft Ventures, pushed the goal higher.

Kyle Samani, co-founder and managing partner of Multicoin Capital, has boasted seeing a torrent of interest in the firm. To Reuters this week, he said:

“What you’re seeing is the next wave of serious investment coming to an exciting, recently-legitimized asset class.”

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