In March, the cryptocurrency market saw significant growth with Bitcoin reaching a new all-time high and billions of dollars flowing into new ETF products. However, there is a particular group of investors who are even more excited than most. During this time, Monad Labs completed a funding round, with participation from venture capital firm Paradigm, valuing the company at $3 billion. By crypto standards, this funding round by Monad is significant and has a notable feature. According to insiders, some individuals known as “Key Opinion Leaders” (KOLs) were granted the opportunity to invest at a valuation of one-fifth of Paradigm’s valuation limit. These “KOL rounds” share similarities with the celebrity trades that U.S. regulators have cracked down on in recent years, and with the market rebounding, these KOL rounds are popping up like mushrooms. This time, it is more likely that crypto bloggers, rather than athletes or reality TV stars, are the ones benefiting from investment discounts.
According to interviews with influencers, entrepreneurs, and legal experts, KOLs typically receive favorable terms such as investment discounts and shorter token lock-up periods in return for promoting cryptocurrency projects. These transactions have become a source of controversy, with the focus on insufficient disclosure of information and the potential risks faced by retail investors.
Several individuals familiar with these types of transactions have stated that some startups have not required KOLs to disclose their relationships during fundraising, which clearly violates relevant U.S. regulations. However, there is currently no evidence to suggest that Monad Labs’ funding round violates any U.S. securities regulations. One investor stated that the company did not make any explicit requirements of KOLs. CEO Keone Hon declined to comment on the attribution terms and disclosure rules applicable to these investors. Paradigm also declined to comment.
KOLs and the cryptocurrency market
Michael Selig, a partner specializing in securities law at international law firm Willkie Farr & Gallagher, stated in an email that including influential individuals such as KOLs in fundraising and expecting them to promote project tokens in the name of investment could be subject to scrutiny by the U.S. Securities and Exchange Commission (SEC).
The existence of KOL rounds is partly due to the uniqueness of the cryptocurrency market. Some cryptocurrency startups offer equity to raise venture capital, while others raise funds by selling their own tokens or subsidiary tokens. The valuation of a project depends on the number and price of tokens sold, similar to stock sales. In addition, there are hybrid financing rounds that combine tokens and equity, such as Monad Labs.
While token purchases generally do not provide the same protections as equity financing, they have a significant advantage in that investors can sell tokens within a few months, whereas stock investors often have to wait for several years before liquidity events such as IPOs.
Another reason is the role influential individuals play in the cryptocurrency market. Over the years, well-known figures ranging from reality TV stars to athletes and self-proclaimed experts have been promoting cryptocurrency projects online, creating a cottage industry. During the initial coin offering (ICO) craze in 2017, having a large number of fans on social media was like having a ticket to wealth, which took the form of getting these popular tokens in advance and being rewarded by selling them.
However, becoming a KOL investor does not necessarily require a large number of fans. Simon Chadwick, co-founder of Cosmos modular multi-chain token issuance platform Eclipse Fi, said, “Almost anyone with influence or a community can become a KOL.” He gave an example of someone with 5,000 followers on Twitter who writes research threads.
Chadwick said that his company has built a network of over 400 KOL investors to help project teams issue tokens. He revealed that due to the high possibility of getting rich, some KOLs even try to use fake social media accounts to make multiple investments in the same funding round.
Chadwick stated that in these types of transactions, KOLs can get discounts of 20% to 50% and shorter token lock-up periods, allowing them to sell tokens earlier than other investors. “Some KOLs have invested in hundreds of rounds and made a lot of money,” Chadwick said.
In fact, the SEC has been cracking down on influencer marketing of cryptocurrency projects. In October 2022, Kim Kardashian agreed to pay $1.3 million to settle charges by the regulatory agency that she failed to disclose her employment when promoting a certain cryptocurrency project token, violating relevant U.S. regulations. However, Kardashian neither admitted nor denied the charges. Similarly, four years ago, the SEC fined former professional boxer Floyd Mayweather.
Emily Meyers, General Counsel and Chief Compliance Officer of cryptocurrency venture capital fund Electric Capital, said that given the SEC’s prosecution of Kardashian and similar cases involving eight celebrities, including Lindsay Lohan, she would advise project teams not to engage in KOL rounds.
Selling at inflated prices
Regardless of regulatory influences, KOL rounds are becoming increasingly controversial in the cryptocurrency field.
CL, a cryptocurrency KOL on Twitter and member of early-stage investment group eGirl Capital, stated in an interview that they have been constantly approached by cryptocurrency projects, hoping that they would invest as KOLs. However, due to potential reputation risks, they have rejected such transactions. CL, who has nearly 200,000 followers on Twitter, said that the surge in KOL transactions is an extension of “pump and dump manipulation of low-market-cap tokens, but on a larger scale.”
Chadwick of Eclipse Fi said that in large-scale transactions supported by major venture capital firms, KOLs are usually willing to accept longer lock-up periods. On the other hand, they often demand higher discounts in these transactions.
Orla Browne, Director of Research at Dealroom, stated that the details of such transactions are often “difficult to obtain,” so the compilers of venture capital data do not report KOL transactions separately.
These types of transactions often take different forms, with some outlined in written contracts specifying the work KOLs should do in promotion, while others are conducted through Telegram. Some are part of a round of financing supported by venture capital, while others are early-stage projects that have not matured enough to attract investment from large institutions.
While most KOL transactions consist entirely of tokens, there are also some that combine equity and subscription rights to unreleased tokens.
Bloomberg has seen a written KOL funding contract that stipulates KOLs who invest at a discounted price must promote the project through long-form podcasts and TikTok videos, among other forms. The agreement states that KOLs must disclose their relationship with the project when promoting it.
However, not all projects do this.
“It’s not a requirement,” said 0xJeff, head of cryptocurrency consulting firm Steak Capital, which lists “KOL management” as one of its services. “It basically depends on whether the KOL wants the community to know that they have invested in this project and whether they are affiliated with the project.”
Spreading uneasiness
Jed Breed, founder of Breed VC, stated in an interview that large cryptocurrency projects typically do not make explicit demands of KOL investors. Instead, the issuers aim to establish a so-called “whisper network” within the cryptocurrency influencer community. “I have never seen such a venture capital deal: ‘If you want this allocation, you need to do X, Y, and Z,'” Breed said.
For popular cryptocurrency startups, they do not need to offer highly favorable terms to KOL investors.
For example, Humanity Protocol, which aims to build a blockchain-based palm print identity verification system, raised $30 million in seed funding at a valuation of $1 billion this month from venture capital firms such as Animoca Brands. KOLs, on the other hand, invested about $1.5 million in March. But their investment terms are “similar to some venture capital firms,” and each person has a maximum investment limit of $25,000, according to Humanity founder Terence Kwok.
Joshua Cheong, a product engineer at Parity Technologies, initially stated in an interview that Monad Labs did not require him to promote the project when investing as a KOL. However, after the publication of this article, Cheong stated that upon reviewing the contract documents, he did not actually participate in this funding round. However, Cheong said that he still “supports the technology.”
OxJeff mentioned that in terms of regions, U.S. KOLs are more cautious about potential scrutiny from the SEC and often disclose their affiliations when promoting projects or tokens. However, regardless of where people are, a sense of unease is quietly spreading throughout the community. This is largely because Zach X BT, a Twitter user with nearly 600,000 followers, has begun publicly criticizing KOL transactions.
“If I say that KOLs are not worried, I would be lying, right? All KOLs are worried,” OxJeff said. “Especially now, there are too many KOL rounds, and many of them are not going smoothly.”
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