The SEC Accuses Founder of a16z and Sequoia-Supported Crypto Startup of Fraud

The initiator of the crypto startup BitClout, once surrounded by significant buzz, is encountering legal difficulties. The SEC took action on Tuesday, charging BitClout’s Nader Al-Naji with allegations of fraud and conducting an unregistered securities offering, accusing him of adopting a pseudonymous identity to dodge regulatory oversight while amassing over $257 million in crypto funds. 

BitClout, a decentralized platform for social media, received backing from leading firms such as a16z, Sequoia, Chamath Palihapitiya’s Social Capital, Coinbase Ventures, and Winklevoss Capital. Notably, during the company’s initial $7 million seed financing, Sequoia contributed $1 million and a16z added $3 million, per insiders familiar with the round’s details. 

According to the SEC’s filing, under the alias “DiamondHands,” Al-Naji assured investors that funds from BitClout’s token, BTCLT, wouldn’t finance personal or staff remunerations. Nevertheless, the SEC claims he diverted over $7 million for personal indulgences, including purchasing a mansion in Beverly Hills and procuring gifts for his family. Al-Naji has remained silent on these charges. A person close to Al-Naji defended the mansion’s purchase, stating it served business purposes by housing BitClout employees and hosting corporate events.

Controversy isn’t new to BitClout, which faced scrutiny right from its inception in 2021 as a crypto-based social exchange where users could trade tokens reflecting individuals’ reputations. Its practice of populating the platform with 15,000 profiles from what was then known as Twitter, assigning these profiles tokens without consent, sparked widespread debate and criticism. This essentially set up a marketplace for trading on celebrities’ popularity.

The platform immediately attracted legal and public criticism. Crypto enterprise Rio Network’s co-founder, Brandon Curtis, served Al-Naji a cease-and-desist notice for using his image unauthorized. Furthermore, Singapore’s then Prime Minister Lee Hsien Loong publicly demanded the removal of his BitClout profile, deeming it unauthorized and misleading through a Facebook post.

The backing of BitClout by renowned firms puzzled many, given the platform’s divisive nature. Insiders revealed that Al-Naji had garnered a favorable reputation in crypto circles following his previous venture, Basis, where he amassed $140 million for a stablecoin project that was ultimately scrapped due to a challenging regulatory climate. He returned investors nearly all of their funding, gaining further trust. 

In early 2021, Al-Naji proposed a new venture to investors, emphasizing a decentralized social network devoid of the social stock market concept. However, a feature testing the latter was inadvertently exposed in April, gaining unexpected popularity and altering the project’s focus, much to some backers’ dismay. Despite initial disruptions, the project pivoted back toward decentralizing social networks through its DeSo Blockchain, as detailed on BitClout’s website.

Despite the early controversies, various tech luminaries defended BitClout publicly. Prominent investors, including a16z’s Andrew Chen and others, invested in the platform, appreciating its innovative approach through posts and praises for Al-Naji’s vision.

The SEC’s legal complaint emphasizes Al-Naji’s anonymity as a core issue, accusing him of creating an illusion of decentralization to obscure the platform’s governance and mislead regulators and the public for personal gain.

Gurbir S. Grewal, the SEC’s Division of Enforcement’s director, criticized Al-Naji’s attempt to circumvent federal laws and mislead investors, highlighting a misconception about decentralization as a defense against regulatory action. 

Sequoia and a16z have refrained from commenting on the matter. 

While Al-Naji has yet to comment on these latest accusations, he has previously signaled confidence in his legal strategy, reflecting on his earlier venture and the substantial legal advice he received. He expressed that these experiences provided him with a solid understanding of securities law and crypto regulations.