Contracting for the Sale of a FTX Bankruptcy Claim

There are a number of digital asset focused funds that have their assets on FTX frozen pending the bankruptcy process.  These managers now have a claim against FTX and it is unclear when such claims will ultimately be settled and for how much.  For a variety of reasons then many of these groups are looking to sell their claims and move on with their operations (either to continue their investment program or to close down). 

In the event a crypto manager does decide to sell a claim, we believe the sale should be memorialized in a contact of some kind, as would be normal operating procedure. However there are not really any standardized contracts for these types of claims.  What we are seeing though is that parties are modifying existing OTC trade document to fit the particulars of this situation.  In these documents we are seeing the following as the main sections:

1. Discussion of the parties – this is pretty clear here, but the main selling party is the fund that holds the claim.  That fund may be a standalone or may be the master fund in a master-feeder structure.
2. Discussion of the claim – the claim will normally be identified by the name of the selling party, but there may be additional information included as well including account numbers, account activity, outstanding amount, etc.
3. Price – obviously this is the most important part for the selling party.  We are seeing/hearing anywhere from 3 cents to 8 cents on the dollar depending on a number of factors.  Managers should speak to at least two counterparties to see what the prevailing price and other terms are for these claims. 
4. Buyer due diligence – the contract may have a discussion about continued buyer due diligence on the claim. [Note: this seems a bit odd and kind of turns the “contract” into more of a kind of “binding term sheet”…]
5. Reps and warranties – manager sellers should be careful of any contract here that requires reps and warranties on the managers behalf.  This is especially true if the manager will be shutting the fund down after the sale of the claim.  It is unclear how the process will play out and the manager does not want to be creating a headache for themselves in later years based on a rep made in haste while trying to sell the asset. We would recommend negotiating this section pretty aggressively. Notwithstanding the above, normal reps regarding AML/KYC, ability to contract, etc are likely to not pose any issues to manager sellers.
6. Miscellaneous items – there are standard miscellaneous items in these contracts around jurisdiction, which is turning into an interesting issue in this bankruptcy case.

If the manager ultimately does decide to sell a bankruptcy claim, they should talk with their various service providers to make sure that all important items are addressed (legal, tax, accounting, audit). 

With respect to the auditor, the most important item is to make sure that title over the claim has fully passed to the third-party so the auditor can determine that the transfer of the asset/claim to the buyer is complete and therefore off the books of the fund. Please note again there may be jurisdictional issues (needing Bahamian counsel) or issues with respect to the bankruptcy process (which may require bankruptcy counsel). We expect that these sales will pick up as managers try to get these claims off of their books by the end of the year.

We are also recommending to clients that they draft some kind of compliance memo to file that discusses all aspects of the decision to sell and the factors around the ultimate sale price.

Please feel free to reach out if you have questions on this process and we will try to keep this post updated as we deal with more of these sales over time.

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Bart Mallon is a founding partner of Cole-Frieman & Mallon LLP.  Cole-Frieman & Mallon has been instrumental in structuring the launches of some of the first cryptocurrency focused hedge funds. For more information on this topic, please contact Mr. Mallon directly at 415-868-5345.