Original article by Leo Schwartz, Fortune Magazine

Original translation: Luffy, Foresight News

When Yida Gao returned to MIT in 2022, the former college pole vaulter and Phi Beta Kappa honoree faced a big challenge. The prestigious university had invited him to teach its business school’s graduate courses on cryptocurrency and finance, a position previously held by Securities and Exchange Commission Chairman Gary Gensler.

A decade after completing his undergraduate studies at MIT, the Chinese immigrant landed on Forbes’ 30 Under 30 list and has been on a tear in the cryptocurrency space ever since. Yida Gao owns his own blockchain-focused venture capital firm, Shima Capital. Gao has raised $200 million from financial giants like Bill Ackman and well-known cryptocurrency companies like Dragonfly and Galaxy, and has become one of the most active investors in the cryptocurrency space by participating in more than 300 investment deals.

Gao’s rise has been rapid, but his pace has 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 is a direct violation of the Investment Advisers Act," said Eric Hess, a lawyer who focuses on digital assets and venture capital.

Gao has not been charged with any crimes, and a representative for Shima Capital told Fortune that the firm does not comment on “such regulatory matters.” But according to a source, Gao’s poor performance and behavior appear to have violated the SEC’s investor protection rules, making it difficult for the one-time cryptocurrency star to raise more money. Despite the booming market, a Shima representative told Fortune that the firm is not currently raising funds.

Gao’s company has experienced a series of senior departures in recent months, including Chief Technology Officer Carl Hua and head of research Alexander Lin, who left Shima Capital earlier this year to start their own venture capital firm, and platform head Hazel Chen. The departed executives did not respond to requests for comment.

Despite the current bullish cryptocurrency market, Shima appears to be struggling. The company’s most recent filing with the U.S. Securities and Exchange Commission (SEC) shows that it has approximately $158 million in assets under management, a figure that is lower than the $200 million Shima raised in 2022.

While corporate malfeasance may be as common as seized Lamborghinis in the cryptocurrency space, Gao has managed to convince an elite group of investors to back him and remain active in the space. His missteps are likely to become fodder for critics of the crypto industry, which has long decried a host of shady practices.

“There are a lot of soft spots in the crypto space,” Hess said. “We need to start paying attention to them and not turn a blind eye to them, unless we are just the abandoned children of the financial system.”

scam

Gao, one of the latest crop of cryptocurrency wizards, follows a more traditional path: clean-shaven, fit, and with an impressive blue-chip institutional resume. He began his career in finance at Morgan Stanley, where he worked in mergers and acquisitions. In his spare time, he invests in startups, often working with well-connected entrepreneur Adam Struck. Gao worked at venture capital giant New Enterprise Associates and briefly attended Stanford Business School before dropping out to join Struck's venture capital firm in Santa Monica full time.

While the partnership between Gao and Struck seemed to be blossoming in the public eye, by 2019, the relationship between the two had become strained behind the scenes. Struck filed a lawsuit alleging that Gao had secretly stolen proprietary information and founded a rival venture capital firm, Shima Capital, in Puerto Rico. Gao denied the allegations, arguing that Struck “devalued” his contributions and refused to acknowledge their equal partnership, which led him to strike out on his own.

Struck has not yet responded to a request for comment on the legal dispute, which was settled in October 2023.

While the settlement was kept under seal, Struck’s attorneys accused Gao in court documents of setting up multiple shell companies, including a British Virgin Islands entity called ShimaB that Gao wholly owned.

Even as he feuded with Struck, Gao used his impressive resume and confident demeanor to convince and raise money from top figures in the cryptocurrency and financial world, such as Bill Ackman and former presidential candidate Andrew Yang. Shima began participating in deals in May 2021 and had invested about $100 million in about 200 projects by September 2022, according to an investment timeline seen by Fortune. Not everyone is impressed by Gao's boyish charm, however.

Several investors, potential backers, and potential portfolio companies told Fortune that Gao and his team were young and inexperienced and didn’t really understand what they were doing but were just jumping on the cryptocurrency bandwagon.

The downsides of betting on Gao soon became apparent. Notably, investors began to worry about how Gao’s firm valued its investments, and people familiar with the matter told Fortune that Gao would boost Shima’s stake based solely on his own ideas. A 2023 Financial Times article noted this was an unorthodox approach. Gao responded that Shima would soon hire professional fund administrators to oversee the accounting.

In another example of questionable accounting, in a document dated September 2022 and seen by Fortune, Shima valued its investment in cryptocurrency exchange Chatex at $250,000, nearly a year after the U.S. Treasury sanctioned the company for facilitating illegal activity such as ransomware and darknet markets.

Despite Gao’s promise to find an auditor, Shima proved difficult to find, with two prominent accounting firms rejecting it because it fell outside their risk parameters, The Block reported in July 2023.

An April 2024 filing with the U.S. Securities and Exchange Commission shows that a Cayman company called MHA Cayman became Shima’s auditor, and a Shima representative confirmed that MHA completed Shima’s 2023 audit in May 2024. MHA did not respond to Fortune’s multiple requests for comment.

Unreliable strategy

In theory, Gao was selling a standard product to investors. He took their money and invested in early-stage blockchain companies, providing exposure to the hot industry while also reaping the benefits of eye-popping growth.

Shima’s difficulty finding an auditor is not typical for a U.S. venture capital firm. It is also unusual that ShimaB’s offshore company is wholly owned by Gao. While many U.S. cryptocurrency venture capital firms have set up offshore entities to deal with the uncertain regulatory environment at home, those entities are owned by the company, not by the individuals who run it.

Gao did share a “fund structure” document with potential investors that outlined Shima’s network of limited liability companies that would hold investor capital and make investments, several of which were registered in the Cayman Islands.

But other internal documents reviewed by Fortune tell a different story. The ShimaB entity that Gao set up under his own name during his partnership with Struck does not appear at all in fund structuring documents or in the prospectus shared with investors.

Meanwhile, other internal documents on Shima’s shareholdings show that more than 100 investments were held by ShimaB, owned by Gao, from mid-2021 to the end of 2022, after Shima announced it had raised $200 million in funding.

While there’s no evidence Gao misappropriated assets through the operation, experts say the conduct constitutes a serious violation of conflict-of-interest rules under the Investment Advisers Act, which spells out venture capital firms’ ethical obligations to their investors. In the ShimaB case, the law appears to prohibit Gao from using investors’ money to invest in entities he owned without making proper disclosures.

Aside from basic transparency, the reason is that if something happened to Gao, such as sudden death or bankruptcy, ownership of the investments could become disputed. “It makes no sense,” said Hess, the venture capital and blockchain lawyer. “I don’t think it’s a sound strategy.”

Warning

In late 2022, Shima’s investors began to see problems with the ownership structure and valuation discrepancies, leading them to alert Shima’s management. Galaxy redeemed its investment, and others with smaller investments, including Bill Ackman’s family office and Dragonfly, largely stayed out of the dispute. That’s because their investments were relatively small, people familiar with the matter said.

In March 2023, Gao attempted to ease concerns by meeting with Shima’s small advisory board and disclosing that the firm had made “warehouse” investments using ShimaB (Note: “Warehouse” investments refer to investments made by fund managers through personally wholly owned entities before the venture capital fund’s investments are closed).

According to the minutes, Shima claimed it made investments using investor capital but had always intended to transfer it to its new firm. In response to a series of questions from Fortune, a Shima representative reiterated that the firm parked investments through “affiliated” entities such as ShimaB and transferred them to Shima’s new fund.

However, the minutes and the representative’s responses do not indicate that the company ever disclosed ShimaB’s arrangements to its investors, nor do they reflect that Gao transferred funds in his own name rather than through Shima. In addition, it is unclear whether Shima would have been able to transfer all of the investment back to the company due to transfer restrictions on many investments.

In addition to investor dissatisfaction, Shima’s compliance issues could have legal implications for Gao and his company. Attorney Hess said that if Shima had not disclosed the suspicious operations during the review, the obvious conflict of interest violation could have given the U.S. Securities and Exchange Commission some leverage. He added that enforcement penalties could range from fines to even stripping Shima of its investment advisory status.

Despite his shady record, Shima continues to be active in investment activity. Investors have flocked to the cryptocurrency market, and memecoins like the popular Dogwifhat have begun to rise as the US regulatory battle is won. In April, Shima became an investor in a new blockchain for Shiba Inu, another dog-themed token.

Gao may not be an outlier in the cryptocurrency space. But for an industry trying to shake off its reputation as an unruly force, his actions offer a cautionary tale for investors who want to avoid making the same mistakes.

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