Why does KOL financing exist? Why is the controversy growing?

Author: Ryan Weeks, Muyao Shen, Hannah Miller, Bloomberg; Compiled by: Wu Baht, Golden Finance

• "Key Opinion Leaders" (KOL) use their influence to obtain significant discounts in financing rounds;

• U.S. Securities and Exchange Commission (SEC) Crack down on KOL marketing of crypto tokens.

Cryptocurrency markets boomed in March as Bitcoin soared to record levels and trillions of dollars flowed into new ETFs. But a select group of investors have more reason to cheer than most.

Around that time, startup Monad Labs was closing on a funding round that valued it at $3 billion from venture capital investors including Paradigm. While large by cryptocurrency standards, the Monad deal had another distinguishing feature: A group of people known in the industry as "key opinion leaders," or KOLs, were allowed to trade for five cents of Paradigm's valuation, people familiar with the matter said. one to invest.

These “KOL rounds,” which bear similarities to celebrity trading that U.S. regulators have cracked down on in recent years, have sprung up as digital assets have made a comeback from a painful bear market. This time, the investors receiving favorable terms are more likely to be cryptocurrency bloggers than athletes or reality TV stars.

Based on interviews with KOLs, entrepreneurs and legal experts, in return for promoting crypto projects, KOLs often receive preferential terms such as valuation discounts and shorter lock-in periods. These preferential treatment conditions have become a source of controversy, with critics pointing to poor information disclosure and potential risks to retail investors.

At least some startups raising money do not require influencers to disclose their affiliations, in apparent violation of U.S. regulations, several people familiar with such deals said.

There is no indication that Monad Labs’ financing activities violated any U.S. securities rules. An investor said that the company did not make any clear requirements for KOL. Chief executive Keone Hon declined to comment on the vesting terms and disclosure rules applicable to such investors.

San Francisco-based Paradigm, which operates one of the largest cryptocurrency venture capital funds, also declined to comment.

KOL and cryptocurrency

Michael Selig, partner at Willkie Farr & said: “Projects that include key opinion leaders and KOLs in a funding round who are expected to go out and promote the project’s tokens as investments may be subject to SEC scrutiny.”< Gallagher LLP, a law firm that specializes in securities law, said in an email.

KOL rounds exist in part because of some unique characteristics of the crypto market. While some digital asset startups raise venture capital funding by providing equity themselves, others do so by selling tokens they issue or are affiliated with. The project’s valuation becomes a function of the number of tokens sold and their price, similar to a stock sale. There are also hybrid funding rounds that mix tokens and equity, such as Monad Labs.

Purchasing a token generally does not provide investors with the same protection as equity financing, but it does offer one big advantage: the possibility of selling in just a few months, whereas stock investors Often trapped for years before a liquidity event such as an IPO.

Then there is the role that KOL plays in the cryptocurrency market. Over the years, cryptocurrencies have cultivated an army of celebrities, from reality TV stars to athletes to self-proclaimed experts in promoting projects online. During the ICO boom of 2017, a large following on “Crypto Twitter” could be a ticket to instant riches—get early access to popular tokens and get compensated for touting them.

Hundreds of rounds of funding to make big money

You don’t always need to have too many followers to have one Qualify to become a KOL investor.

"Pretty much anyone with influence or community," said Simon Chadwick, co-founder of crypto platform Eclipse Fi. "That person could be someone who has 5,000 people on Twitter writing a research post," He was referring to the social media platform now known as X.

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

Chadwick stated that KOLs in such transactions can receive 20% to The 50% discount and shorter lock-up period means they can sell their tokens earlier than other investors.

“Some of these KOLs have made hundreds of investment rounds and made a lot of money,” he said.

The U.S. Securities and Exchange Commission has been cracking down on KOL marketing of cryptocurrency projects. In October 2022, Kim Kardashian agreed to pay $1.3 million to settle regulators' charges that she violated U.S. regulations by promoting digital tokens, without disclosing how much she was paid. She has not admitted or denied the allegations. Four years ago, the SEC fined Floyd Mayweather for failing to disclose a similar cryptocurrency arrangement.

Kim Kardashian Photographer: Michael Reynolds/EPA/Bloomberg

Cryptocurrency Emily Meyers, general counsel and chief compliance officer at venture capital fund Electric Capital, said the regulator's charges include Lin's actions in light of the SEC's action against Kardashian and similar cases last year. Eight celebrities, including Lindsay Lohan, failed to get KOL financing, and she will warn projects against KOL financing.

The six accused celebrities, including Lohan, settled the case without admitting or denying the SEC's charges.

The SEC did not respond to a request for comment on the KOL round.

"Pump and Dump"

Regardless of the regulatory impact, KOL rounds are becoming increasingly controversial in the cryptocurrency space.

A cryptocurrency KOL who posted under the pseudonym CL on "non-stop" promotion, hoping to invest as a KOL. CL lives outside the United States and asked that their identity not be used due to the sensitivity of the topic. CL said it has steered clear of such transactions due to potential reputational risks.

CL, who has nearly 200,000 followers on An extension of market cap tokens, but on a much larger scale." CL said KOL investments in such transactions are usually quickly followed up by "well-known institutions" , to grant projects legitimacy and drive up prices.

Eclipse Fi’s Chadwick said, KOLs are generally willing to accept funding from large venture capital firms Longer lock-in periods in larger deals where backers participate. On the other hand, they tend to ask for bigger discounts in such deals, he said.

Cryptocurrency venture capital trading resumes

Orla Browne, head of insights at Dealroom, said that because details of KOL purchases are often "difficult to Obtained”, compilers of venture capital data do not report KOL rounds separately.

They often take different forms, with some deals containing written contracts outlining the KOL’s work in promotion, Others are done through Telegram. Some are part of venture capital-backed funding rounds; other projects are in their early stages and not yet mature enough to attract the attention of major institutions.

While most KOL transactions consist entirely of tokens, some Warrants that combine equity and yet-to-be-launched digital currencies.

Bloomberg News has seen a written contract for KOL financing, which stipulates that KOLs invested at a discount must be through various forms ranging from long-form podcasts to TikTok videos. to promote the project. The agreement stipulates that KOLs must disclose their relationship with the project when promoting it.

But many other projects do not.

“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 whether the KOL side wants to let the community know that they have invested in the project and that they are associated with the project,” said OxJeff, who liked CL’s tweet anonymously and asked that their real names not be used.

Uneasiness spreads

Jed Breed, founder of Breed VC, said that larger crypto projects generally do not Put forward clear requirements for KOL investors. Instead, such issuers aim to build what he calls a “whisper network” within the cryptocurrency KOL community. "I've never seen a venture capital deal where it was, 'If you want this allocation, you need to do X, Y, Z,'" Breed  said.

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

Humanity Protocol, which is building a blockchain network that uses people’s palm prints to verify identities, raised a $1 billion valuation this month from venture investors including Animoca Brands. Terence Kwok, founder of Humanity, said KOL invested about $1.5 million in March, but their investment terms were "almost the same as some venture capital firms" and their investments were capped at $25,000 each. .

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

OxJeff said that KOLs in the United States are more wary of potential SEC scrutiny and tend to disclose their affiliations when promoting projects or tokens.

But OxJeff said unease began to spread throughout the community no matter where people were. This is largely because ZachXBT, an influential Twitter user with nearly 600,000 X followers whose account describes them as “Rug Pull Survivors,” has begun publicly lambasting KOL trading.

 “Everyone is worried, especially now, there are too many KOL rounds, and many of them are not going well.”