The SEC has charged an a16z and Sequoia-backed crypto startup founder with fraud

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

BitClout, a decentralized social media platform, has raised investments from notable firms including a16z, Sequoia, Chamath Palihapitiya’s Social Capital, Coinbase Ventures, and Winklevoss Capital. According to sources familiar with the seed round at the time, most of these big-name investors were involved in the company’s roughly $7 million seed round, with Sequoia investing $1 million and a16z investing $3 million.

The SEC complaint alleges that Al-Naji, known by his online alias “DiamondHands,” told investors that proceeds from the platform’s token, BTCLT, would not be used to pay himself or his employees. But the SEC alleges that Al-Naji 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, that several BitClout employees lived there and that he held company-sponsored events at the home.

The complaint is the latest for a company that has been no stranger to controversy since the beginning. When it launched in 2021, BitClout was designed as a social crypto exchange where users would buy and sell tokens based on people’s reputations. It made waves and earned criticism by collecting 15,000 profiles from the company, then known as Twitter, and attaching crypto tokens to celebrities. It essentially created an exchange for celebrities, with the price of the tokens rising and falling based on how popular the person was.

The public and legal backlash was swift. Brandon Curtis, co-founder of crypto firm Rio Network, sent Al-Naji a cease-and-desist letter, saying BitClout had used his likeness without his consent. Former Singaporean Prime Minister Lee Hsien Loong even publicly petitioned for BitClout’s profile to be removed. “It’s misleading and was done without my consent,” he wrote on Facebook.

At the time, many wondered why such highly respected companies would support such a polarizing concept. Sources close to the company explained that Al-Naji gained a reputation in crypto circles after his previous company, Basis. The Princeton graduate raised $140 million to create a stablecoin in 2018. But soon after, Al-Naji realized that the regulatory environment was too unfavorable for crypto and decided to return the money, these sources said. Investors got back about 93 cents on the dollar, according to a person close to Al-Naji.

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So when Al-Naji approached investors with a new idea in early 2021, investors were inclined to give it a second chance. According to sources close to the company, Al-Naji raised the seed funding in a broad presentation of a decentralized social media platform, with no emphasis on the social exchange market. But then, in April, Al-Naji planned to quietly test the exchange feature and lock it behind a password-protected web page. The password was immediately leaked and the feature went viral, suddenly becoming a major focus for Al-Naji. According to multiple sources, this upset several investors. The company eventually went back to its original presentation and instead focused on DeSo Blockchain, a blockchain “built specifically to decentralize social networks,” according to the BitClout website.

Still, in the immediate aftermath of the mining furor, many tech leaders publicly defended BitClout. Investors like a16z’s Andrew Chen, Michael Arrington, and angel investor Shaan Puri poured thousands of dollars into buying tokens on the platform. Chen posted about a month after BitClout launched, writing that the app had a “really interesting approach” by incentivizing users with financial rewards. And a post by Shaun Maguire of Sequoia Capital praised investor Al-Naji’s “transformative vision” and called BitClout “immediately exciting.”

The polarization between those angry that BitClout was “traded” without their permission and those defending the initiative is further complicated by the fact that there is no CEO who can speak on behalf of the company. Al-Naji’s anonymity is a key element of the SEC’s complaint, which alleges that he made BitClout look like “there was no company behind it… just money and code,” even though he allegedly made millions of dollars in profits.

“Al-Naji attempted to evade federal securities laws and defraud the investing public by falsely believing that ‘fake’ decentralization often confuses regulators and keeps them from pursuing you,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement released by the SEC. “He is plainly mistaken.”

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 reflected on his previous crypto company and the $10 million it spent on lawyers. He said the lawyers taught him everything he could about securities and cryptocurrency laws, and he took those lessons to BitClout. “I learned a lot,” he said. “And I think we got it right this time.”