crypto VC Shima Capital is winding down operations amid SEC's fraud charges against its founder

Shima Capital Management, a crypto venture capital firm that raised $200 million in 2021, is winding down operations a few weeks after the Securities and Exchange Commission (SEC) filed fraud charges against its founder, Yida Gao.

Journalist Kate Irwin shared screenshots of an email Gao sent to the founders of his VC’s portfolio companies, in which he announced his resignation as managing director and outlined plans for an orderly wind-down of the fund.

The SEC filed its complaint on November 25, alleging that Gao raised more than $158 million from 349 investors between May 2021 and March 2023 using marketing materials that contained material misrepresentations about his investment track record. 

One pitch deck claimed a prior investment had generated a 90 times return, when in fact Gao had earned just 2.8 times, according to the complaint.

When Gao learned that a news article was about to expose the discrepancies, he allegedly contacted several investors and falsely characterized them as mere clerical errors, the SEC said.

What other schemes were Shima Capital’s founder involved in?

The charges also cover a separate scheme involving a special purpose vehicle called the BitClout SPV. In April and May 2021, Gao raised approximately $11.9 million from five investors, claiming he could purchase BitClout tokens at a substantial discount that would protect their investments. 

However, prosecutors allege that Gao purchased the tokens at a discount but sold them to the SPV at higher prices, pocketing $1.9 million in undisclosed profits.

Gao has consented to a settlement requiring him to pay disgorgement of over $3.9 million plus $304,622.67 in prejudgment interest. The agreement includes a permanent injunction from future violations and an officer-and-director bar, with civil penalties to be determined later. 

The US Attorney’s Office for the Northern District of California also unsealed a parallel criminal action against Gao on the same day.

In his email to portfolio company founders, Gao apologized for his conduct. “I deeply regret my misguided decisions and apologize for letting you down,” he wrote, adding that both actions related to his individual conduct rather than Shima Capital funds or portfolio companies.

FTI Consulting will oversee Shima wind-down 

The fund will now undergo an “independent wind-down” led by crypto specialists from FTI Consulting and FTI Capital Management, who he said “will lead the orderly wind-down process and serve as the fund’s replacement registered investment adviser.”

He wrote, “FTI is in the process of being engaged, and once that process is complete, members of the Shima team and I will work closely with FTI to support an effective transition. We will seek to achieve the best possible outcome for the portfolio with the intent to maintain operational continuity.”

Gao stated that there would be no forced sales and that investments would be realized based on normal market conditions. The existing finance team, including the chief financial officer (CFO), will remain in place during the transition.

Shima Capital launched in 2021 and announced its first fund in 2022, attracting backing from prominent investors including Dragonfly Capital, Animoca Brands, OKX Blockdream Capital, and former US presidential candidate Andrew Yang. 

The firm positioned itself as a major player in early-stage blockchain investments, building a portfolio that also includes Humanity Protocol and Shiba Inu and investing in Berachain, Monad, Pudgy Penguins, Sleepagotchi, Gunzilla, and dozens of other crypto projects.

Regulators will still pursue crime 

The case is a notable shift from the common regulatory enforcement within the crypto sector, which has historically focused on exchanges, token issuers, and decentralized finance platforms. 

The SEC’s action against Shima reinforces the Paul Atkins-led SEC’s promise to still pursue illegal and criminal conduct despite rolling back years of overregulation from the Gensler era. Its venture capital firm target also signals sector-wide monitoring, and this includes investment practices in the digital asset sector, where performance metrics have been notoriously opaque.

Shima Capital made news in 2024 for the wrong reasons when reports got out that Gao had routed investments through an undisclosed offshore entity, and other outlets questioned the firm’s practices regarding asset valuations and money transfers.

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