SEC charges a16z and Sequoia-backed crypto startup founder with fraud

The founder of the once-hyped crypto startup BitClout is facing trouble. On Tuesday, the SEC charged BitClout founder Nader Al-Naji with fraud and unregistered offering of securities, claiming he used a pseudonym to avoid regulatory scrutiny while raising more than $257 million in cryptocurrency.

BitClout, a decentralized social media platform, has raised funding from several major firms such as a16z, Sequoia, Chamath Palihapitiya’s Social Capital, Coinbase Ventures, and Winklevoss Capital. Many of these large investors were involved in the company’s roughly $7 million seed round, with Sequoia investing $1 million and a16z investing $3 million, according to sources familiar with the seed round at the time.

The SEC’s complaint alleges that Al-Naji, known by his online pseudonym “Diamondhands,” told investors that proceeds from the platform’s token, BTCLT, would not be used to pay himself or employees. But the SEC alleges he spent more than $7 million on personal expenses such as a Beverly Hills mansion and gifts for his family. Al-Naji did not respond to a request for comment. A source close to Al-Naji said the mansion was used for business purposes, with several BitClout employees living there and holding company-sponsored events at the home.

The complaint is the latest for a company that has been surrounded by controversy from the start. When it launched in 2021, BitClout aimed to be a social crypto-exchange where users bought and sold tokens based on people’s reputations. It made waves and earned criticism by scraping 15,000 profiles from the company then known as Twitter and attaching crypto tokens to celebrities. This essentially created a stock market for famous people, with the price of the tokens rising and falling based on the person’s popularity.

There was also a fierce public and legal reaction. Brandon Curtis, co-founder of crypto company Rio Network, wrote a letter to Al-Naji warning that BitClout had used his image without his consent. Former Singapore Prime Minister Lee Hsien Loong publicly appealed that BitClout’s profile be removed. He wrote on Facebook, “This is misleading and was done without my permission.”

At the time, many wondered why such prestigious firms backed such a polarizing concept. In crypto circles, Al-Naji had earned goodwill after his previous company, Basis, failed to make a profit, sources close to the company said. In 2018, the Princeton graduate raised a whopping $140 million to create a stablecoin. But shortly after, Al-Naji realized that the regulatory environment was too hostile for crypto and decided to return the money, these sources said. According to the person close to Al-Naji, investors got back about 93 cents on the dollar.

So, in early 2021, when Al-Naji approached investors with a new idea, they were more inclined to give him a second chance. According to sources close to the company, Al-Naji raised his seed round on a broad pitch of a decentralized social media platform, without any emphasis on a social stock market. But then, in April, Al-Naji intended to test the stock market feature quietly, locking it behind a password-protected webpage. The password was promptly leaked and the feature went viral, suddenly becoming a huge focal point for Al-Naji. According to multiple sources, this made many investors nervous. The company eventually returned to its original pitch, instead focusing on its DeSo blockchain, a blockchain that is “specifically designed to decentralize social networks,” according to the BitClout website.

Still, in the immediate aftermath of the scrapping noises, several tech veterans publicly defended BitClout. Investors like a16z’s Andrew Chen, Michael Arrington, and angel investor Shaan Puri spent thousands of dollars buying tokens on the platform. Chen posted on BitClout about a month after its launch, writing about how the app has a “really interesting approach” by incentivizing users with financial rewards. And, in a post by Sequoia Capital’s Sean Maguire, the investor praised Al-Naji’s “transformational vision” and called BitClout “instantly electrifying.”

The polarization between those angry that “trades” were made on BitClout without their permission and those defending the startup was further complicated by the fact that there was no CEO to speak on behalf of the company. Al-Naji’s hidden identity is one of the key tenants of the SEC’s complaint, which claims that he made BitClout appear as if there was “no company behind it … only coins and code,” while the commission claims he was allegedly reaping millions in profits.

“Al-Naji attempted to evade the federal securities laws and deceive the investing public by falsely believing that being ‘fake’ decentralized generally confuses regulators and prevents them from going after you,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement released by the SEC. “He is obviously wrong.”

Sequoia and a16z declined to comment.

While Al-Naji has yet to comment on the allegations, he has previously expressed confidence in his company’s legal standing. At an event in late 2021, he spoke about his previous crypto company and how he spent $10 million on lawyers. He said the lawyers taught him everything they could about securities and cryptocurrency law — lessons he took with him to BitClout. “I learned a lot,” he said. “And I think we did the right thing this time.”