author | Ryan Weeks, Muyao Shen, Hannah Miller, Bloomberg
Compile | Yangz, Techub News
In March, the cryptocurrency market was booming, with Bitcoin hitting all-time highs and billions of dollars flowing into new ETF products. But one particular group of investors was cheering more than most.
At the time, Monad Labs closed a round of funding that valued it at $3 billion from venture capital firms including Paradigm . By crypto standards, Monad’s round was huge, and it had one notable feature: People familiar with the matter said that some people in the industry, known as “key opinion leaders” (KOLs), were allowed to invest at a cap of one-fifth of Paradigm’s valuation.
These “KOL rounds,” which bear similarities to celebrity deals that U.S. regulators have cracked down on in recent years, have sprung up as the market has recovered. This time, the people who get the investment discounts are more likely to be crypto bloggers than athletes or reality TV stars.
In return for promoting cryptocurrency projects, KOLs often receive favorable terms such as investment discounts and shorter token vesting periods, according to interviews with some influencers, entrepreneurs and legal experts. These deals have become a source of controversy, with the focus on insufficient disclosure and potential risks to retail investors.
Several people familiar with the deals said at least some startups have raised money without requiring influencers to disclose their relationships, a clear violation of U.S. regulations.
However, there is no indication that Monad Labs violated any U.S. securities regulations with this round of funding. One investor said the company did not make any explicit requests for KOLs. CEO Keone Hon declined to comment on what vesting terms and disclosure rules apply to such investors. Paradigm also declined to comment.
KOLs and Cryptocurrency
“Including influencers such as KOLs in financing and expecting them to promote the project’s tokens in the name of investment may be subject to scrutiny by the SEC,” Michael Selig, a partner specializing in securities law at the international law firm Willkie Farr & Gallagher, said in an email.
The reason why “KOL rounds” exist is partly due to some unique characteristics of the cryptocurrency market. Some cryptocurrency startups offer equity to raise venture capital, while others raise funds by selling their own tokens or affiliated tokens. The valuation of the project depends on the number and price of tokens sold, similar to stock sales. In addition, there are hybrid financing rounds that mix tokens and equity, such as Monad Labs.
Buying tokens generally doesn’t give investors the same protections as equity financing, but it does have a big advantage in that investors can sell tokens in just a few months, whereas stock investors often have to wait years before a liquidity event such as an IPO.
Another part of the story is the role that influencers play in the cryptocurrency market. For years, celebrities from reality TV stars to athletes and self-proclaimed experts have promoted cryptocurrency projects online, spawning a copycat industry. During the initial coin offering (ICO) boom of 2017, having a large following on CT was like getting a ticket to riches in the form of early access to these hot tokens and getting paid to peddle them.
However, to become a KOL investor, you don’t necessarily need a large number of followers.
Simon Chadwick, co-founder of Eclipse Fi, a Cosmos modular multi-chain token issuance platform, said: "Almost anyone with influence or community can become a KOL." "For example, someone with 5,000 followers on Twitter who writes research threads."
Chadwick said the company built a network of more than 400 KOL investors to help projects issue tokens. He revealed that because the possibility of getting rich quickly is so great, some KOLs even try to use fake social media accounts in order to invest multiple times in the same round of financing.
Chadwick said that in such deals, KOLs can get 20% to 50% discounts and shorter token vesting periods, which means they can 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 US SEC has been cracking down on influencer marketing for cryptocurrency projects. In October 2022, Kim Kardashian agreed to pay $1.3 million to settle regulators' allegations that she violated US regulations by failing to disclose that she was employed when promoting a crypto project token. But Kardashian did not admit or deny the allegations. Similarly, four years ago, the US SEC fined former professional boxer Floyd Mayweather.
Emily Meyers, general counsel and chief compliance officer at crypto venture capital fund Electric Capital, said she would remind project owners not to conduct KOL rounds of financing in light of the SEC's prosecution of Kardashian and a similar case last year involving eight celebrities including Lindsay Lohan.
Pump and Sell
Regardless of regulatory implications, KOL rounds are becoming increasingly controversial in the cryptocurrency space.
A cryptocurrency KOL named CL on Twitter, who is a member of the early investment group eGirl Capital, said that they have recently "constantly" received pitches from cryptocurrency projects hoping that they would invest as KOLs. However, they rejected such deals due to potential reputational risks. CL, who has nearly 200,000 followers on X, said that the surge in KOL transactions is "an extension of the pump and dump manipulation of low-market-cap tokens, but on a larger scale."
KOLs are often willing to accept longer vesting periods in larger deals backed by large venture capitalists, said Chadwick of Eclipse Fi. But on the other hand, they also tend to demand higher discounts in such deals.
Orla Browne, head of research at Dealroom, said that because such deal details are often “difficult to obtain,” weavers of venture capital data do not report KOL deals separately.
Such deals usually take different forms, some in the form of written contracts outlining what the KOL should do in terms of promotion, while others are done through Telegram. Some are part of a venture capital-backed round of funding, while others are early-stage projects that have not yet matured enough to attract investment from large institutions.
While most KOL deals consist entirely of tokens, there are some that combine equity with subscription rights to yet-to-be-launched tokens.
A written contract for KOL financing reviewed by Bloomberg requires KOLs who invest at a discount to promote the project through long-form podcasts and TikTok videos. The agreement stipulates that KOLs must disclose their affiliation with the project when promoting it.
However, not all projects do this.
“It’s not a requirement,” said 0xJeff, head of Steak Capital, a cryptocurrency consulting firm that lists “KOL management” as one of its services. “It basically depends on whether the KOL wants to let the community know that they have invested in the project and whether they are affiliated with the project.”
The spread of anxiety
Jed Breed, founder of Breed VC, said in an interview that large cryptocurrency projects usually do not make explicit requirements for KOL investors. Instead, these issuers aim to build a so-called "whisper network" among the cryptocurrency influencer community. Breed said: "I have never seen a venture capital deal that is like this: 'If you want to get this allocation, you need to do X, Y, Z.'"
For popular cryptocurrency startups, they do not need to offer very favorable terms to KOLs.
For example, Humanity Protocol, which aims to build a blockchain-based palm print identity authentication system, raised $30 million in seed funding from venture capital firms such as Animoca Brands this month at a valuation of $1 billion. KOLs invested about $1.5 million in it in March. But their investment conditions are "the same as some venture capital firms," and the investment limit for each person is $25,000, said Terence Kwok, founder of Humanity.
Joshua Cheong, a product engineer at Parity Technologies, initially said in an interview that Monad Labs did not ask him to promote the project when he invested as a KOL. But after this article was published, Cheong said that after reviewing the contract documents, he was not actually involved in the investment round. But Cheong said he still "supports this technology."
OxJeff said that in terms of region, KOLs in the United States are more cautious about potential scrutiny from the U.S. SEC, and they tend to disclose their affiliations when promoting projects or tokens. But no matter where people are, the uneasiness of the entire community has begun to spread quietly. This is largely because Zach X BT (a Twitter user with nearly 600,000 X followers) has begun to publicly criticize KOL trading.
“I’d be lying if I said KOLs weren’t worried, right? All KOLs are worried,” OxJeff said. “Especially right now, there are so many KOL funding rounds, and a lot of them don’t go well.”
