A familiar avenue to instant cryptocurrency bargains reopens

(Bloomberg) — Crypto markets were booming in March, as Bitcoin hit a record high and billions of dollars flowed into new ETFs. But one particular group of investors had more reason to celebrate than most.

Most read on Bloomberg

At that time, startup Monad Labs was completing a funding round in which venture capitalists including Paradigm valued it at $3 billion. While large by crypto standards, the Monad deal had another distinguishing feature: Certain people known in the industry as “key opinion leaders” were allowed to invest at one-fifth of Paradigm’s valuation, they said. said people with knowledge of the subject.

These “KOL streaks,” which bear similarities to the celebrity deals cracked down by U.S. regulators in recent years, have proliferated as digital assets have come back from a bruising bear market. This time around, investors benefiting from softened terms are more likely to be crypto bloggers than athletes or reality TV stars.

In exchange for promoting crypto projects, KOLs typically receive favorable terms such as valuation discounts and shorter vesting periods, according to interviews with influencers, entrepreneurs and legal experts. The deals have become a source of controversy, with critics focusing on poor disclosure and potential risks for retail investors.

At least some fundraising startups don’t require influencers to disclose their affiliations, said several people with knowledge of such deals — an apparent violation of U.S. regulations.

There is no indication that Monad Labs’ fundraising violated U.S. securities rules. One person who invested said the company places no explicit requirements on KOLs. CEO Keone Hon declined to comment on the acquisition terms and disclosure rules applied to these investors.

San Francisco-based Paradigm, which runs one of the largest crypto-VC funds, also declined to comment.

Influencers and crypto

“Projects that include key thought leaders and influencers in a funding round in the hope that these individuals will promote the project’s token as an investment may be examined by the Securities and Exchange Commission,” Michael Selig , a partner at Willkie Farr & Gallagher LLP, who specializes in securities law, said in an email.

The story continues

KOL cycles exist in part because of some unique characteristics of crypto markets. While some digital asset startups offer equity themselves to raise venture capital funds, others do so by selling the tokens they issue or are affiliated with. The valuation of the project becomes a function of the number of pieces sold and their price, like a sale of shares. There are also hybrid funding rounds mixing tokens and equity, such as Monad Labs.

Purchasing tokens generally doesn’t offer investors the same protections as seed rounds, but it does offer one big advantage: the ability to sell in just a few months, whereas stock investors are often locked in for years before a liquidity event like an IPO. .

Then there is the role that influencers play in the cryptocurrency markets. For years, crypto has nurtured a cottage industry of famous personalities ranging from reality TV stars to athletes and self-proclaimed experts promoting online projects. During the initial coin supply boom in 2017, a large following on “crypto Twitter” could be a ticket to instant wealth, in the form of early access to hot tokens and compensation for their promotion.

“Winning so much money”

It doesn’t always take a lot of follow-up to qualify as a KOL investor.

“It’s almost anyone who has influence or a community,” said Simon Chadwick, co-founder of crypto platform Eclipse Fi. “It could be someone who has 5,000 people on Twitter and writes search threads,” he said, referring to the social media platform now known as X.

Eclipse Fi helps projects built on a blockchain called Cosmos launch tokens. To facilitate this process, the company has a network of more than 400 KOL investors that startups can tap into, Chadwick said. The potential for quick returns is so great that some influencers are trying to use fake social media accounts in order to invest multiple times in the same funding round, he said.

According to Chadwick, KOLs participating in these types of transactions can benefit from discounts of 20-50% as well as shorter vesting terms, meaning they can sell their tokens sooner than other investors.

“Some of these KOLs invest in hundreds of rounds, making so much money,” he said.

The SEC has cracked down on influencer marketing from crypto projects. In October 2022, Kim Kardashian agreed to pay $1.3 million to settle regulator allegations that she broke US rules by promoting a digital token, without disclosing that she had been paid for the TO DO. She neither admitted nor denied the allegations. Four years earlier, the SEC fined Floyd Mayweather for failing to disclose a similar crypto deal.

HAMBURG, GERMANY – MAY 07: Kim Kardashian on stage during the OMR 2024 festival on May 7, 2024 in Hamburg, Germany. (Photo by Tristar Media/Getty Images) (Tristar Media via Getty Images)

Emily Meyers, general counsel and chief compliance officer of crypto fund VC Electric Capital, said she would caution projects against KOL rounds in light of the SEC’s actions against Kardashian and a similar case the last year, where the regulator accused eight celebrities, including Lindsay Lohan, of failure. to reveal that they were paid to promote tokens.

Six of the celebrities charged, including Lohan, settled the case without admitting or denying the SEC’s allegations.

The SEC did not respond to a request for comment on the influencer tours.

“Pumping and dumping”

Regardless of the regulatory ramifications, KOL cycles are becoming controversial in the crypto space.

A crypto influencer, who posts on CL, who is based outside the United States and asked that his identity not be used due to the sensitivity of the subject, said he avoided such deals because of the potential risk to his reputation.

The increase in KOL transactions is “an extension of low-market-cap tokens, but on a larger scale,” said CL, who has nearly 200,000 followers on X. Influencers’ investments in such transactions are often followed quickly by a “well-known institution” to lend legitimacy to the project and drive up prices, CL said.

KOLs are generally willing to accept a longer vesting period in larger deals involving large venture capital backers, Eclipse Fi’s Chadwick said. On the other hand, they tend to ask for deeper discounts on such transactions, he said.

Because details on influencer purchases are often “hard to get,” venture data compilers don’t publish separate reports on KOL cycles, said Orla Browne, chief insights officer at Dealroom.

They often take different forms, with some deals having written contracts outlining what the KOLs are expected to do in terms of promotions, while others are done via Telegram. Some are part of venture-backed funding rounds; others are early-stage projects, not yet mature enough to court large institutions.

Although most KOL transactions consist entirely of tokens, some feature a combination of shares and warrants for digital coins that have not yet been launched.

A written contract for a KOL funding round, a redacted copy of which was viewed by Bloomberg News, specified that influencers who invested at a discount had to promote the project through formats ranging from long-form podcasts to TikTok videos. The agreement states that KOLs must disclose their affiliations with the project when touting it.

But this is not the case for many other projects.

“It’s not a requirement,” said 0xJeff, who runs crypto consulting firm Steak Capital, which lists “KOL management” among its services. “It really depends on the side of the KOLs if they want to let the community know that they invested in the project and are affiliated with the project or not,” said OxJeff, who likes CL’s anonymous tweets and has asked for his real name. not to be used.

The uneasiness spreads

Large crypto projects generally do not impose explicit requirements on KOL investors, said Jed Breed, founder of Breed VC. Instead, these transmitters aim to create what he called a “whisper network” within the crypto-influencer community. “I’ve never seen a venture capital deal where it was like, ‘If you want this allocation, you have to do X, Y, Z,'” Breed said.

Some startups are so hot that they don’t need to offer very favorable terms to KOLs.

Humanity Protocol, which is building a blockchain network that uses people’s palm prints to verify their identities, this month raised funding worth $1 billion from venture capitalists like Animoca Brands. KOLs invested about $1.5 million in March – but they did so “literally on the same terms as some venture capital firms” and their investments were capped at $25,000 per person, founder said by Humanity, Terence Kwok.

Joshua Cheong, a product engineer at Parity Technologies who participated as a KOL in Monad Labs’ funding round, said the company did not ask him to promote the project when he invested. He declined to comment on the valuation and vesting period.

According to OxJeff, US-based influencers are more wary of possible SEC scrutiny and tend to disclose their affiliations when promoting a project or token.

But a sense of unease is starting to creep into the community, regardless of where people are, OxJeff said. This is largely because ZachXBT, an influential tweeter with nearly 600,000 X-followers whose handle describes him as a “mat survivor,” began publicly lambasting KOL deals.

“I’d be lying if I said KOLs weren’t worried, right? All the KOLs are worried,” OxJeff said. “Especially these days when there are too many KOL tours and many don’t go very well.”

Most read from Bloomberg Businessweek

©2024 Bloomberg LP

Fuente