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Failure of FTX demonstrates the need for reform of private placements, Says SEC officials

In this post:

  • The Securities and Exchange Commission of the US blames former CEO Samuel Bankman-Fried for FTX’s failure
  • SEC released a new statement stating that failures like FTX show us that there is a need for reforms of the private placement
  • SEC’s current regulations on private placements to allow for more innovation and investment opportunities

FTX was overgrowing after its foundation in 2019, and in 2021, it had more than 1 million users worldwide. Similarly, it was the third-largest crypto exchange in terms of volume and had invested billions of dollars in different companies. But things took an unexpected turn at the start of 2022, and a few months later, FTX signed for bankruptcy. What were the reasons behind this? It is still a debatable topic in the crypto market.

No matter what is the reason behind its failure, it has impacted the market so badly. The market has yet to come out of that shock. The Securities and Exchange Commission of the US blames former CEO Samuel Bankman-Fried for this failure. The SEC believes that SBF has gathered more than 1.8B dollars from FTX in equity since 2019. According to the commission, SBF gave a false impression to the people that FTX was safe and it the best platform for trading crypto.

FTX failure

There are two known reasons for the failure of FTX: FTT and Alameda. The SBF’s exchange issued FTT, which was essentially a stake in FTX, and promised to repurchase it with a fraction of its revenues. However, at the start of 2022, CoinDesk revealed that the group’s hedge fund, Alameda, was utilizing FTT to make hazardous loans, basically trading with company stock.

This news was enough for the FTT holders to sell their shares. But the already fire was ignited by Binance when it announced that the company was going to sell all its FTT holding tokens. And the rest is history.  

SEC’s new press release regarding FTX

SEC released a new statement stating that failures like FTX show us that there is a need for reforms of the private placement. The SEC Commissioner Hester Pierce says that there are limitations of SEC regulations on private placement that need to be addressed. Peirce said that the current regulations limited private placements to accredited investors only.

These regulations are limited to those who are considered financially capable and sophisticated enough to assess deals that come with limited information compared to public issues. But, according to Piece, these restrictions suppress innovations and opportunities for non-accredited investors to invest in new startups.

She cited the examples of private companies like FTX, Theranos, and WeWork, which did not provide adequate disclosure of their private placement, which led to failures like FTX. According to her, despite the regulations being in place, these companies provide inadequate disclosures in their private placements.

That is why she said that there is a need for new reforms regarding private placements. Furthermore, Pierce highlights the SEC’s six-page form, which is required for private placement. This six-page private placement is sold to an unlimited number of accredited investors, and most contain check-the-box questions. This form is intended to protect investors, but Peirce contends that it might not be sufficient to verify that the corporations are making enough disclosures.

These are the precise reasons why Peirce is advocating for a reconsideration of the SEC’s current regulations on private placements to allow for more innovation and investment opportunities.

Final thoughts

To avoid failures like FTX, SEC Commissioner Hester Peirce advocates for a reconsideration of the SEC’s regulations on private placements to allow for more innovation and investment opportunities. It is because the already regulations stifle innovation and limit investment opportunities for non-accredited investors.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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