SatoshiVM became one of the hot projects in the first half of 2024, partly due to the “drama” caused by KOLs. In January 2024, SatoshiVM launched its token, SAVM. With many collaborating KOLs hyping it early on, the token price surged from the day of issuance, quickly reaching $11.66 shortly after release. However, controversy erupted when it was revealed that KOLs received tokens from the project team and immediately sold them, leading to significant disputes and a subsequent price decline. As of June 12, 2024, SAVM’s lowest trading price within 24 hours was $2.07, far from its earlier highs.

In fact, collaboration between crypto projects and KOLs has long been a standard marketing approach in the industry, giving rise to the concept of KOL round financing. However, KOLs participating in KOL rounds face numerous legal issues, especially when the projects they are involved in experience significant market fluctuations.

Today, Manquin Law Firm will discuss the topic of crypto KOL rounds—what is a KOL round? What are its legal risks? And how can these risks be mitigated?

KOL and KOL round

(1) What is KOL?

KOL (Key Opinion Leader), literally translated as “key opinion leader,” refers to individuals who possess more accurate product information and are accepted or trusted by relevant groups, exerting significant influence over their purchasing behaviors.

In the Web3.0 domain, KOLs essentially comprise experienced investors or enthusiasts with a solid understanding of the field, having accumulated a substantial following as prominent figures in the crypto community. Due to their considerable attention, they enjoy greater exposure, and the information they disseminate reaches a wider audience.

As “experts” in the Web3.0 realm, KOLs do not necessarily need to amass a massive following to be recognized as such. Even KOLs with as few as 5000 followers have opportunities to receive promotional invitations from projects and earn compensation through project endorsements.

KOLs typically earn income through two main methods: first, receiving immediate compensation like traditional influencers do, such as common Giveaway KOLs seen on platforms like X or endorsements by NBA stars; second, participating as project investors, leveraging their influence as “equity holders” or directly investing in projects. After a project launches its token, they may receive tokens as investors or early contributors, either at a discount or as part of their investment.

(2) How to understand the KOL round?

KOL round financing actually falls under the second form mentioned earlier. The differing terminology arises from different perspectives.

From the perspective of project financing, some crypto startups raise venture capital by offering equity, while others raise funds by selling their issued tokens or subsidiary tokens. Some companies also adopt hybrid financing rounds combining tokens and equity.

KOL round refers to a financing approach where projects invite KOLs for promotion while also considering them as investors. Unlike other investors, KOLs as early contributors typically negotiate discounts or even receive token allocations for free when purchasing tokens from the project.

In April 2024, RootData, a Web3.0 asset data platform, released statistics on KOL participation in project financing over the past six months. dingaling ranked first by participating in 21 project financings.

It’s worth noting that, according to this ranking, NFT players account for a relatively high proportion. One possible reason is that the NFT market has underperformed in recent years. Therefore, NFT projects and KOLs also need to seek new growth points and breakthroughs to further stimulate market activity. The collaboration between project teams and KOLs may be one of the reasons for the large influx of NFT players into primary and secondary markets.

What legal issues do KOL rounds need to pay attention to

(1) Regulatory developments related to KOL rounds

In China, based on regulations such as the Advertising Law, the Code of Conduct for Internet Broadcasters, and the Guiding Opinions of the State Administration for Market Regulation on Strengthening the Regulation and Management of Internet Live Streaming, traditional KOLs are required to clearly disclose their commissioned promotional relationships with brands in textual or video promotions, and they are subject to relevant regulatory oversight. For instance, if a KOL inserts product endorsements in a video, they need to label it as advertising when publishing the video.

However, in the crypto industry, China currently lacks specific legal support tailored to this context.

In contrast, in the United States, according to a disclosed KOL financing contract reported by Bloomberg, KOLs who invest at a discounted rate must promote projects through long-form podcasts, TikTok videos, or other formats. Additionally, KOLs are required to disclose their affiliations with the projects when promoting them.

Simultaneously, KOLs’ promotion in the crypto industry is also subject to scrutiny by the U.S. Securities and Exchange Commission (SEC). For instance, in October 2022, Kim Kardashian was found in violation of U.S. regulations by the SEC for failing to disclose her commissioned relationship with a project token when promoting it, leading to scrutiny and charges.

However, in practice, it’s often difficult for external parties to ascertain the exact relationships and internal trading patterns between project teams and KOLs. Not all project teams or KOLs disclose their internal affiliations. Therefore, unless there are whistleblowers, regulatory authorities find it challenging to obtain detailed information about KOL rounds, making effective oversight of KOL rounds often difficult.

(2) False propaganda suspected of fraud

As surfers of Web3.0, many investors are aware that even if KOLs are paid merely to advertise without participating in project financing, their overly positive endorsements of projects should not be taken at face value. Following this line of thought further, once KOLs start purchasing or intending to purchase project tokens, their feedback on project information becomes even more questionable.

According to statements from industry insiders, few KOLs can provide truthful statements in their promotions. Their remarks often contain vague, ambiguous, or completely false content, intending to induce investors to buy project tokens.

In fact, there are legal risks of civil fraud or even criminal fraud associated with KOLs using partially true, exaggerated promotional methods. According to Article 148 of the Civil Code, if KOLs’ false statements lead investors to misunderstand and purchase tokens or participate in projects, resulting in financial losses, the KOLs’ actions constitute civil fraud, and investors have the right to claim compensation.

More seriously, if KOLs intentionally illegally appropriate investors’ assets and deceive them into channeling funds to project parties, resulting in financial losses to investors, the KOLs’ actions may potentially violate Article 266 of the Criminal Law regarding fraud, leading to criminal liability.

(3) Risks of illegal pyramid schemes

Based on the previous discussion, the cooperation model between KOLs and project parties often lacks transparency, and it’s difficult for outsiders to understand how KOLs receive project tokens. However, if the allocation of tokens to KOLs is tied to the number of investors successfully attracted through their promotion, and if KOLs promote within their paid communities, this practice may potentially constitute illegal pyramid selling activities.

According to Article 224 of China’s Criminal Law, the criteria for defining the crime of organizing and leading pyramid-selling activities include: charging “entry fees,” compensating based on recruitment numbers, inducing or coercing participants to continue recruiting others, and forming a hierarchical structure of three or more levels.

Therefore, if a KOL meets these criteria while promoting a project—charging membership fees for their community, receiving token rewards based on the number of recruited investors, and enticing investors to recruit others and form a hierarchical structure of three levels or more—then the KOL’s actions may constitute the crime of organizing and leading pyramid selling activities, leading to criminal liability.

(4) Risk of being identified as an accomplice in a criminal crime

Recently, the ZKasino project has sparked widespread concern over the risks associated with KOL project promotions. In March 2024, the project launched a funding staking activity. Multiple KOLs participated in ZKasino’s KOL round financing and promoted the project through channels such as Twitter, crypto community forums, and offline events, receiving corresponding token commissions and investment incentives.

However, after over a million users bridged over ten thousand ETH into the project, ZKasino unilaterally changed and deleted the official website’s activity instructions. They not only failed to return users’ staked ETH as agreed but also forcibly converted all users’ ETH into platform tokens.

This action has sparked significant controversy, with some KOLs who participated in the financing and promotion of the project facing strong criticism and accusations from their followers after the project was accused of a “soft rug” (exit scam). They are accused of facilitating profit transfer and may be held criminally liable as “accomplices.”

Like the KOLs involved in this incident, many KOLs often view their actions of promoting projects and selling project tokens at high prices as normal business investment behaviors, with no responsibility to users or connection to the project team.

However, as seen in this case, KOLs can reap benefits from the skyrocketing of project tokens but also face significant legal risks if the project encounters problems. If the project team becomes embroiled in criminal activities due to fundraising methods or project content, and KOLs play a significant role in promoting and publicizing the project, they may be charged by judicial authorities under Article 25 of the Criminal Law of the People’s Republic of China for knowingly or should have known the insider information of the project team and be held accountable accordingly.

Some seasoned KOLs have already recognized these risks and begun taking self-protection measures. For instance, KOL 0xKillTheWolf shared on Twitter reasons for refusing to participate in the ZKasino KOL round, including doubts about project valuation, revenue data, and distrust of the founder’s character. Such cautious attitudes serve as valuable lessons for other KOLs to emulate.

The KOL wheel is not that fragrant either.

From the above analysis of legal risks, it’s evident that KOLs participating in Web3.0 projects’ KOL round financing and engaging in promotional activities should pay attention to the following key points to avoid misleading investors and prevent involvement in criminal cases:

Conduct comprehensive due diligence and risk assessment of the project, understanding key information such as its operational model, revenue model, growth prospects, and potential risks.

When promoting the project, fully disclose any interests they hold in the project’s tokens.

Avoid engaging in false advertising of the project and refrain from abusing their influence to manipulate the market.

Some KOLs may believe that promoting projects based overseas or for overseas projects exempts them from judicial oversight in China. However, according to relevant provisions of China’s Criminal Law, jurisdiction applies if the criminal act or its consequences occur within China’s jurisdictional boundaries or if the KOL holds Chinese nationality.

Finally, lawyer Manquan advises that KOLs in the Web3.0 sector should exercise caution when conducting any promotions. By adopting a responsible approach towards investors, they can leverage their role as “Key Opinion Leaders” to contribute positively to the healthy development of the Web3.0 ecosystem.

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