By Ryan Weeks, Muyao Shen, Hannah Miller, Bloomberg

Compiled by: Yangz, Techub News

In March, the cryptocurrency market has been booming, with Bitcoin reaching a new all-time high and billions of dollars flowing into new ETF products. However, there is a special group of investors who are even more excited than most investors.

At that time, Monad Labs closed a funding round that valued it at $3 billion by venture capital firms, including Paradigm. From the standard of the encryption circle, Monad's round of financing is huge, and there is also a significant feature. Some people known in the industry as "Key Opinion Leaders" (KOLs) are allowed to invest at the upper end of one-fifth of Paradigm's valuation, people familiar with the matter said.

These "KOL rounds" share similarities with the celebrity deals that US regulators have cracked down on in recent years, and have sprung up as the market picks up. This time, it's more likely that encryption bloggers will get discounts on their investments than athletes or reality TV stars.

From interviews with some influencers, entrepreneurs, and legal experts, it can be learned that as a reward for promoting cryptocurrency projects, KOLs usually receive investment discounts and shorter token lock-up periods and other favorable conditions. These transactions have become a source of controversy, with the focus on inadequate information disclosure and potential risks faced by retail investors.

Several people familiar with such transactions have indicated that at least some startups have not required KOLs to disclose their relationship during fundraising, which clearly violates relevant US regulations.

However, there is no indication that Monad Labs violated any U.S. securities regulations in this round. One investor said the company did not make any explicit requirements for KOLs. Chief Executive Officer Keone Hon declined to comment on what vesting terms and disclosure rules apply to such investors. Paradigm also declined to comment.

KOL and Cryptocurrency

Michael Selig, a partner specializing in securities law at international law firm Willkie Farr & Gallagher, said in an email: "The Token inclusion of influencers such as KOLs in a financing with the expectation that they will promote a project in the name of investment could be scrutinized by U.S. SEC."

"The existence of 'KOL Rounds' financing 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 issued tokens or subsidiary tokens. The valuation of the project depends on the quantity and price of the tokens sold, similar to stock sales. In addition, there are also hybrid financing rounds that combine tokens and equity, such as Monad Labs."

Buying tokens generally does not provide investors with the same level of protection as equity financing, but it does have a significant advantage: investors can sell tokens in just a few months, while stock investors often have to wait several years before liquidity events such as IPOs occur.

Another reason lies in the role of influencers in the Crypto Assets market. For longing years, celebrities ranging from reality TV stars to athletes and self-proclaimed experts have been promoting Crypto Assets online, giving birth to a altcoin industry. In the 2017 ICO (ICO) boom, having a large following on CT was like getting a ticket to get rich, in the form of early access to these popular Token and getting paid to sell Token.

However, to become a KOL investor, it is not necessary to have a large number of fans.

Cosmos modular multi-chain token issuance platform Eclipse Fi co-founder Simon Chadwick said, "Almost anyone influential or with a community can become a KOL. For example, someone with 5000 followers on Twitter who writes research-oriented threads."

Chadwick said that in order to help the project team issue coins, the company has built a network composed of more than 400 KOL investors. He revealed that due to the possibility of getting rich overnight, some KOLs even tried to use fake social media accounts to invest multiple times in the same round of financing.

Chadwick said that in such transactions, KOLs can get discounts ranging from 20% to 50% and shorter token lock-up 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.

Actually, the US SEC has been cracking down on influencers marketing cryptocurrency projects. In October 2022, Kim Kardashian agreed to pay $1.3 million to settle charges from regulatory authorities that she failed to disclose her promotional activities for a certain cryptocurrency token while being paid, which violated US regulations. However, Kardashian neither admitted nor denied the charges. Similarly, four years ago, the US SEC fined former professional boxer Floyd Mayweather as well.

Emily Meyers, General Counsel and Chief Compliance Officer of Electric Capital, a cryptocurrency venture capital fund, stated that in light of the SEC's lawsuit against Kim Kardashian and similar cases involving eight celebrities including Lindsay Lohan last year, she would advise projects not to engage in KOL fundraising.

Sell on High

Regardless of how regulatory influences may be, KOL rounds are becoming increasingly controversial in the cryptocurrency field.

Crypto Assets KOLs, who are members of the early investment group eGirl Capital and go by the name CL on Twitter, said they have recently received "non-stop" pitches from Crypto Assets projects asking them to invest as KOLs. But because of the potential reputational risk, they turned down such deals. CL, who has nearly 200,000 followers on X, said the surge in KOL deals was "an extension of the low-market capitalization Token pull-and-dump manipulation, but on a larger scale."

In large-scale transactions supported by major venture capitalists, KOLs (Key Opinion Leaders) are usually willing to accept longer lock-up periods, according to Chadwick from Eclipse Fi. On the other hand, they often request higher discounts in such transactions.

Dealroom's research director, Orla Browne, said that due to the difficulty in obtaining such transaction details, compilers of venture capital data do not report the trading situation of KOLs separately.

This type of transaction usually takes different forms, some of which outline the work that KOLs should do in promoting in the form of written contracts, while others are completed through Telegram. Some are part of a round of financing supported by venture capital, while others are early-stage projects that are not yet mature enough to attract investment from large institutions.

Although most KOL transactions are entirely composed of tokens, there are also some transactions that combine equity and subscription rights to unreleased tokens.

Bloomberg has seen a financing agreement for KOLs (Key Opinion Leaders) that stipulates KOLs who invest at a discounted price must promote the project through long-form podcasts and TikTok videos. The agreement requires KOLs to disclose their relationship with the project when promoting it.

However, not all projects do this.

"It's not a requirement," said 0xJeff, head of Crypto Assets Consultancy Steak Capital, which lists "KOL management" as one of its services, "basically depending on whether KOLs are long wick candle wanting the community to know that they have invested in the project and whether they are affiliated with the project."

Spreading uneasiness

Breed VC founder Jed Breed said in an interview that large cryptocurrency projects usually do not make specific demands on KOL investors. Instead, the goal of these issuers is to establish a so-called "whisper network" within the cryptocurrency influencer community. Breed said, "I have never seen a venture capital deal like this: 'If you want to get this allocation, you need to do X, Y, Z.'"

For popular cryptocurrency startups, they don't need to offer very favorable conditions to KOLs.

For example, the Humanity Protocol, which aims to create a blockchain-based palmprint identity verification system, raised $30 million in seed funding from investors such as Animoca Brands this month, with a valuation of $1 billion. KOLs also invested approximately $1.5 million in March. However, their investment terms are "similar to some venture capital firms," and each person's investment limit is $25,000, according to Terence Kwok, the founder of Humanity.

Parity Technologies product engineer Joshua Cheong initially stated in an interview that Monad Labs did not require him to promote the project when he invested as a KOL. But after the publication of this article, Cheong stated that after reviewing the contract documents, he actually did not participate in this round of investment. However, Cheong said that he still "supports this technology".

OxJeff said that, in terms of regions, KOLs in the United States are more cautious about potential scrutiny from the SEC. They often disclose their affiliations when promoting projects or tokens. However, regardless of where people are, the overall community's anxiety has quietly spread. This is largely because Zach X BT (a Twitter user with nearly 600,000 followers) has started openly criticizing KOL transactions.

"If I say that KOLs are not worried, that would be a lie, right? All KOLs are very worried," OxJeff said. "Especially now, KOLs have raised too much funding, and many of them are not going smoothly."