"KOL Round Financing": A New Path to Wealth or the Next Target of the SEC

Written by: Ryan Weeks, Muyao Shen, Hannah Miller, Bloomberg

Compiled by: Yangz, Techub News

In March, the cryptocurrency market thrived, with Bitcoin reaching an all-time high and billions of dollars flowing into new ETF products. However, there was one special group of investors who were more excited than most.

At that time, Monad Labs completed a funding round, with venture capital firms including Paradigm valuing it at $3 billion. By crypto standards, this funding round was massive and had a notable characteristic. Insiders reported that some individuals known in the industry as "key opinion leaders" (KOLs) were allowed to invest at a cap valued at one-fifth of Paradigm's valuation.

This type of "KOL round" bears similarities to the celebrity trading that U.S. regulators have cracked down on in recent years, and as the market warms up, these "KOL rounds" have sprung up like mushrooms after rain. This time, it is more likely that crypto bloggers, rather than athletes or reality TV stars, will receive investment discounts.

Interviews with some influencers, entrepreneurs, and legal experts reveal that in return for promoting cryptocurrency projects, KOLs typically receive favorable terms such as investment discounts and shorter token vesting periods. These deals have become a source of controversy, focusing on insufficient disclosure of information and the potential risks faced by retail investors.

Several individuals familiar with such transactions indicated that at least some startups did not require KOLs to disclose their relationships during fundraising, which clearly violates U.S. regulations.

However, there are currently no indications that Monad Labs' funding round violated any U.S. securities laws. One investor stated that the company did not impose any explicit requirements on 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

Michael Selig, a partner at the international law firm Willkie Farr & Gallagher specializing in securities law, stated in an email: "Incorporating influential figures like KOLs into funding and expecting them to promote the project's tokens in the name of investment may come under scrutiny from the U.S. Securities and Exchange Commission."

The existence of "KOL rounds" is partly due to some unique characteristics of the cryptocurrency market. Some crypto startups offer equity to raise venture capital, while others raise funds by selling their own issued tokens or associated tokens. The valuation of a project depends on the quantity and price of the tokens sold, similar to stock sales. Additionally, there are hybrid financing rounds that combine tokens and equity, such as Monad Labs.

Purchasing tokens generally does not provide investors with the same protections as equity financing, but it does have a significant advantage: investors can sell tokens within just a few months, while stock investors often have to wait years for liquidity events like IPOs.

Another reason is the role that influential figures play in the cryptocurrency market. For years, well-known individuals, from reality TV stars to athletes and self-proclaimed experts, have been promoting cryptocurrency projects online, seemingly giving rise to a cottage industry. During the initial coin offering (ICO) boom in 2017, having a large following on social media was akin to holding a ticket to wealth, in the form of early access to these popular tokens and earning rewards by selling them.

However, becoming a KOL investor does not necessarily require a large following.

Simon Chadwick, co-founder of the Cosmos modular multi-chain token issuance platform Eclipse Fi, stated: "Almost anyone with influence or a community can become a KOL. For example, someone with 5,000 followers on Twitter who writes research threads."

Chadwick mentioned that to assist project teams in issuing tokens, his company has built a network of over 400 KOL investors. He revealed that due to the potential for wealth, some KOLs even attempt to use fake social media accounts to invest multiple times in the same funding round.

Chadwick stated that in these types of transactions, KOLs can receive discounts ranging from 20% to 50% and shorter token vesting periods, meaning 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 SEC has been cracking down on influencer marketing in cryptocurrency projects. In October 2022, Kim Kardashian agreed to pay $1.3 million to settle allegations from regulators that she failed to disclose her compensation while promoting a cryptocurrency project token, violating U.S. regulations. However, Kardashian did not admit or deny the allegations. Similarly, four years ago, the SEC fined former professional boxer Floyd Mayweather.

Emily Meyers, chief legal officer and chief compliance officer at crypto venture capital fund Electric Capital, stated that in light of the SEC's prosecution of Kardashian and a similar case last year involving eight celebrities including Lindsay Lohan, she would advise project teams against conducting KOL rounds.

Pump and Dump

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

CL, a member of the early investment group eGirl Capital and a crypto KOL on Twitter, stated that they have been "constantly" receiving pitches from cryptocurrency projects hoping they would invest as KOLs. However, due to potential reputational risks, they have declined such deals. With nearly 200,000 followers on X, CL noted that the surge in KOL transactions is "an extension of low market cap token pump and dump manipulation, but on a larger scale."

Chadwick from Eclipse Fi mentioned that in large transactions backed by major venture capital, KOLs are often willing to accept longer vesting periods. On the other hand, they tend to demand higher discounts in such transactions.

Orla Browne, head of research at Dealroom, stated that because the details of such transactions are often "difficult to obtain," venture capital data compilers do not report KOL transaction situations separately.

These transactions typically take different forms, with some outlining the work KOLs should do in promoting the project in written contracts, while others are completed via Telegram. Some are part of a venture-backed funding round, while others are early projects not yet mature enough to attract large institutional investments.

While most KOL transactions consist entirely of tokens, there are also some that combine equity with subscription rights for tokens that have not yet been launched.

Bloomberg has seen a written contract for KOL funding stipulating that KOLs investing at a discount must promote the project through long podcasts and TikTok videos. The agreement requires KOLs to disclose their relationship with the project when promoting it.

However, not all projects do this.

"This is not a requirement," said 0xJeff, head of the cryptocurrency consulting firm Steak Capital, which lists "KOL management" as one of its services. "It basically depends on whether the KOL wants the community to know they have invested in this project and whether they are affiliated with it."

Spreading Unease

Jed Breed, founder of Breed VC, stated in an interview that large cryptocurrency projects typically do not impose explicit requirements on KOL investors. Instead, the goal of these issuers is to establish what is known as a "whisper network" within the cryptocurrency influencer community. Breed said, "I've never seen a venture capital deal that goes like this: 'If you want 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 instance, Humanity Protocol, which aims to create a blockchain-based fingerprint identity verification system, raised $30 million in seed funding this month at a valuation of $1 billion from venture capital firms like Animoca Brands. KOLs invested about $1.5 million in March. However, their investment terms "are similar to some venture capital firms," and the investment cap per person is $25,000, according to Humanity founder Terence Kwok.

Joshua Cheong, a product engineer at Parity Technologies, initially stated in an interview that Monad Labs did not require him to promote the project while investing as a KOL. However, after this article was published, Cheong stated that upon reviewing the contract documents, he realized he did not actually participate in this funding round. Nevertheless, Cheong said he still "supports the technology."

OxJeff noted that, regionally, U.S. KOLs are more cautious about potential SEC scrutiny, often disclosing their relationships when promoting projects or tokens. However, regardless of where people are located, a sense of unease has begun to quietly spread throughout the community. This is largely due to Zach X BT (a Twitter user with nearly 600,000 followers) publicly criticizing KOL transactions.

"If I said KOLs aren't worried, that would be a lie, right? All KOLs are very concerned," OxJeff said. "Especially now, there are too many KOL rounds, and many of them are not going smoothly."