(Bloomberg) -- Crypto markets were booming in March, as Bitcoin barreled toward a record and billions of dollars flowed into new ETFs. But one particular group of investors had greater reason to cheer than most. 

Around that time, startup Monad Labs was wrapping up a funding round in which venture capital investors including Paradigm valued it at $3 billion. While big by crypto standards, the Monad deal had another distinguishing feature: Some people known in the industry as “key opinion leaders” were allowed to invest at a fifth of the Paradigm valuation, people with knowledge of the matter said. 

These “KOL rounds,” which bear similarities to the celebrity deals US regulators cracked down on in recent years, have mushroomed as digital assets roared back from a bruising bear market. This time around, the investors getting sweetened terms are more likely to be crypto bloggers than athletes or reality-TV stars. 

In return for promoting crypto projects, KOLs typically get favorable terms like 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 zeroing in on poor disclosures and potential risks to retail investors. 

At least some startups raising money aren’t requiring influencers to disclose their affiliations, several people with knowledge of such deals said — an apparent violation of US regulations. 

There is no indication that the Monad Labs fundraising violated any US securities rules. One person who invested said the company didn’t impose any explicit requirements on KOLs. Chief Executive Officer Keone Hon declined to comment on what vesting terms and disclosure rules were applied to such investors. 

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

Influencers And Crypto

“Projects that include key opinion leaders and influencers in a financing round with the expectation that such persons will go out and promote the project’s token as an investment may be scrutinized by the Securities and Exchange Commission,” Michael Selig, a partner at Willkie Farr & Gallagher LLP who specializes in securities law, said in an email. 

KOL rounds exist in part because of some unique features of crypto markets. While some digital-asset startups offer equity in themselves to raise VC money, others do it by selling the tokens they issue or are affiliated with. The valuation of the project becomes a function of the number of coins sold and their price, similar to a stock sale. There are also hybrid funding rounds that mix tokens and equity, like Monad Labs. 

Buying tokens generally doesn’t give investors the same protections as in equity rounds, but it does offer one big advantage: the potential to sell in as little as months, whereas stock investors are often tied up for years before a liquidity event like an IPO.  

Then there’s the role influencers play in cryptocurrency markets. For years, crypto has nursed a cottage industry of famous individuals ranging from reality-TV stars to athletes and self-proclaimed experts promoting projects online. During the 2017 initial coin offering boom, a big following on “crypto Twitter” could be a ticket to instant riches, in the form of early access to hot tokens and compensation for touting them. 

‘Making so Much Money’

It doesn’t always take much of a following to qualify as a KOL investor.

“It’s almost anyone that has influence or a community,” said Simon Chadwick, co-founder of crypto platform Eclipse Fi. “It could be someone who’s got 5,000 people on Twitter who writes research 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 make that process easier, the company has a network of over 400 KOL investors startups can tap, said Chadwick. The potential for quick returns is so great that some influencers try to use fake social media accounts so they can invest several times in the same funding round, he said.

KOLs in these types of deals can get discounts of 20% to 50% as well as shorter vesting terms, meaning they can sell their tokens earlier than other investors, according to Chadwick. 

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

The SEC has been cracking down on influencer marketing of crypto projects. In October 2022, Kim Kardashian agreed to pay $1.3 million to settle the regulator’s allegations that she broke US rules by promoting a digital token without disclosing that she was paid to do it. She didn’t admit or deny the allegations. Four years earlier, the SEC fined Floyd Mayweather for failing to disclose a similar crypto arrangement. 

Emily Meyers, general counsel and chief compliance officer of crypto VC fund Electric Capital, said she would caution projects against KOL rounds in light of the SEC’s actions against Kardashian and a similar case last year, where the regulator charged eight celebrities including Lindsay Lohan with failing to disclose 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 didn’t respond to a request for comment on influencer rounds. 

‘Pump-and-Dumping’

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

One crypto influencer, who posts on X under the pseudonym CL and is a member of early-stage investing collective eGirl Capital, said they’ve been receiving “non-stop” pitches from crypto projects recently to invest as a KOL. CL, who is based outside the US and asked that their identity not be used because of the sensitivity of the topic, said they’ve steered clear of such deals because of the potential reputational risk. 

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

KOLs are typically willing to accept longer vesting period in bigger deals featuring large venture-capital backers, said Eclipse Fi’s Chadwick. On the flip side, they tend to ask for steeper discounts in such transactions, he said. 

Because details on influencer purchases are often “hard to come by,” compilers of venture-capital data don’t break out separate reporting on KOL rounds, said Orla Browne, head of insights at Dealroom. 

They often take different forms, with some deals featuring written contracts outlining what KOLs are expected to do in terms of promotions while others are done over Telegram. Some are parts of VC-backed funding rounds; others are early-stage projects not yet mature enough to court major institutions. 

Though most KOL deals are entirely made up of tokens, some feature a combination of equity and warrants for yet-to-be launched digital coins. 

One 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 were required to promote the project through formats ranging from long-form podcasts to TikTok videos. The agreement said KOLs must disclose their affiliations with the project when touting it.

But many other projects don’t. 

“It’s not a requirement,” said 0xJeff, who runs crypto advisory firm Steak Capital, which lists “KOLs management” among its services. “It really depends from the KOL side whether they want to let the community know that they’ve invested in the project and they’re affiliated with the project or not,” said OxJeff, who like CL tweets anonymously and asked that their real name not be used.

Unease Spreading

Bigger crypto projects typically don’t make explicit demands on KOL investors, said Jed Breed, founder of Breed VC. Instead, such issuers aim to drum up what he called a “whisper network” among the crypto-influencer community. “I’ve never seen a VC deal where it’s like, ‘if you want this allocation, you need to do X, Y, Z’,” Breed said.

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

Humanity Protocol, which is building a blockchain network that uses people’s palm prints to verify their identity, raised funds at a $1 billion valuation this month from VC investors like Animoca Brands. KOLs put in around $1.5 million in March — but they did so at “literally the same terms as some of the VCs” and their investments were capped at $25,000 per person, Humanity founder Terence Kwok said. 

Joshua Cheong, a product engineer at Parity Technologies, originally told Bloomberg that Monad Labs didn’t require him to promote the project when he invested as a KOL. After publication, Cheong told Bloomberg that upon reviewing his documentation, he realized he had not in fact participated in the round. Cheong said he remained “supportive of the technology.”

Influencers based in the US are more wary of potential SEC scrutiny and tend to disclose their affiliations when promoting a project or token, according to OxJeff.

But unease is starting to creep in across the community, regardless of where people are located, OxJeff said. That’s in no small part because ZachXBT, an influential tweeter with almost 600,000 X followers whose handle describes them as a “rug pull survivor,” has started publicly lambasting KOL deals. 

“I would be lying if I said the KOLs aren’t worried, right? All the KOLs are worried,” said OxJeff. “Especially these days when there are too many KOL rounds and many don’t go so well.”

(Updates with additional comment from Joshua Cheong about the extent of his exposure to Monad Labs.)

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