BitClout, a decentralized social media platform, raised from. Who’s-who of firms, like a16z, Sequoia, Chamath Palihapitiya’s Social Capital, Coinbase Ventures, and Winklevoss Capital. Many of these big-name investors were in at the company’s roughly $7 million seed round. Sequoia investing $1 million and a16z investing $3 million, according to sources close to the seed round at the time.
SEC Allegations BitClout
The SEC 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 that he spent over $7 million on personal expenses, like a Beverly Hills mansion and gifts for his family. Al-Naji did not respond to a request for comment.
Controversial Beginnings
The complaint is the latest for a company that has been no stranger to controversy from the start. It made waves and earned criticism by scraping 15,000 profiles. The company then known as Twitter and attaching crypto tokens to celebrities. It essentially created a stock market for famous people, with the price of the tokens rising and falling based on how popular the person was.
Legal Backlash BitClout
The public – and legal – backlash was swift. Brandon Curtis, cofounder of crypto company Rio Network, hit Al-Naji with a cease-and-desist letter, saying BitClout used his likeness without consent. Lee Hsien Loong, the former Prime Minister of Singapore, even made a public plea asking for his BitClout profile to be removed. “It is misleading and done without my permission,” he wrote on Facebook.
Esteemed Backers
At the time, many wondered why such esteemed firms had backed such a polarizing concept. Sources close to the company explained that, in crypto circles, Al-Naji had earned goodwill after his previous company, Basis. In 2018, the Princeton grad had raised a whopping $140 million to create a stablecoin. But shortly after Al-Naji realized the regulatory environment was too inhospitable to crypto and he 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.
Investors Give a Second Chance
According to sources close to the company, Al-Naji raised his seed round on the broad pitch of a decentralized social media platform, with no emphasis on the social stock market. But then, in April, Al-Naji intended to quietly test the stock market feature, locking it behind a password-protected webpage. The password promptly leaked and the feature went viral, suddenly becoming a huge focal point for Al-Naji. This upset several investors, according to multiple sources. The company eventually steered back to its original pitch, focusing instead on its DeSo Blockchain, a blockchain “built specifically for decentralizing social networks,” according to the BitClout website.
Tech Bigwigs Support BitClout BitClout
Still, immediately after the scraping brouhaha, plenty of tech bigwigs publicly defended BitClout. Investors like a16z’s Andrew Chen, Michael Arrington, and angel investor Shaan Puri poured thousands into 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 Shaun Maguire, the investor praised Al-Naji’s “transformative vision” and called BitClout “instantly electrifying.”
The Hidden CEO BitClout
The polarization among those angry at being “traded” on BitClout without their permission and those defending the startup was made even more complicated by the fact that there wasn’t a CEO to speak to on behalf of the company. Al-Naji’s hidden identity is one of the key tenets of the SEC’s complaint, which claims that he made BitClout appear like there was “no company behind it … just coins and code,” when he allegedly was, the commission claims, pocketing millions in profit.
SEC’s Statement
“Al-Naji attempted to evade the federal securities laws and defraud the investing public, mistakenly believing that ‘being ‘fake” decentralized generally confuses regulators and deters them from going after you,’” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement, in a statement released by the SEC. “He is obviously wrong.”
Reactions from Investors
Sequoia and a16z declined to comment.
Al-Naji’s Confidence in Legal Standing
While Al-Naji has yet to speak on the allegations, he previously expressed confidence in his company’s legal footing. At an event in late 2021, he reflected on his previous crypto company and how he spent $10 million on lawyers. The lawyers, he said, taught him all about securities and the law around cryptocurrencies – lessons he took with him to BitClout. “I learned a lot,” he said. “And I think we did it right this time.”
