The founder of the once-popular crypto startup BitClout is in trouble. On Tuesday, the SEC charged BitClout founder Nader Al-Naji with fraud and an unregistered securities offering. He allegedly used a pseudonym to evade regulators’ scrutiny and raise more than $257 million in crypto.
BitClout, a decentralized social media platform, has raised funding from big names like a16z, Sequoia, Chamath Palihapitiya's Social Capital, Coinbase Ventures, and Winklevoss Capital. According to sources close to the seed round at the time, many of these big-name investors participated in the seed round, which was worth around $7 million, with Sequoia investing $1 million and a16z investing $3 million.
The SEC’s complaint alleges that Al-Naji, known by his online alias “DiamondHands,” told investors that any profits generated from the platform’s token, BTCLT, would not be paid out to him or his employees. However, the SEC alleges that he spent more than $7 million on personal expenses, including 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 hosting company-sponsored events at the home.
This complaint is the latest in a series of cases from a company that has been no stranger to controversy since its inception. When BitClout launched in 2021, it was supposed to be a social cryptocurrency exchange where users would buy and sell tokens based on people’s reputations. It caused a stir and drew criticism when it scraped 15,000 profiles from the company then known as Twitter and attached cryptocurrency tokens to celebrities. Essentially, it created a stock market for celebrities, with the price of the tokens fluctuating based on their popularity.
Public and legal backlash followed quickly. Brandon Curtis, co-founder of cryptocurrency company Rio Network, sent Alnaji a cease and desist letter, saying BitClout had used his likeness without his consent. Former Singapore Prime Minister Lee Hsien Loong even publicly appealed for BitClout to remove his profile. “This is misleading and was done without my permission,” he wrote on Facebook.
At the time, many wondered why such a respected company would support such a polarizing concept. A source close to the company explained that Al-Nazi had gained favor in the crypto community through his previous company, Basis. In 2018, the Princeton graduate raised a whopping $140 million to create a stablecoin. But Al-Nazi soon realized the regulatory environment was too hostile to crypto and decided to return the money, the source said. According to a person close to Al-Nazi, investors got back about 93 cents on the dollar.
So when Alnaji approached investors in early 2021 with a new idea, investors were willing to give him a second chance. According to sources close to the company, Alnaji had raised a seed round in a broad pitch for a decentralized social media platform without any emphasis on social stock markets. But in April, Alnaji quietly tested the stock market feature, locking it behind a password-protected webpage. The password was immediately leaked, and the feature went viral, suddenly becoming Alnaji’s main focus. This angered several investors, according to multiple sources. The company eventually went back to its original pitch and instead focused on the DeSo blockchain, a blockchain “built specifically to decentralize social networks,” according to the BitClout website.
Nonetheless, shortly after the scraping incident, many tech heavyweights publicly championed 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 wrote on BitClout about a month after its launch that the app had a “really interesting approach” to incentivizing users with monetary rewards. And in a post by Sequoia Capital’s Shaun Maguire, the investor praised Al-Naji’s “innovative vision” and called BitClout “instantly electrifying.”
The polarization between those upset that BitClout was “traded” without permission and those who defend the startup is compounded by the fact that there is no CEO who can speak on behalf of the company. Al-Naji’s hidden identity is one of the core tenants of the SEC’s complaint, which claims that he made BitClout look like “there was no company behind it, just the coins and the code.” The commission claims he made millions of dollars in profits.
“Alnaji sought to evade the federal securities laws and defraud the investing public, under the false pretense that ‘fake’ diversification generally confuses regulators and keeps 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 was simply wrong.”
Sequoia and a16z declined to comment.
Al-Nazi has yet to comment on the allegations, but has previously expressed confidence in the company’s legal foundations. At an event in late 2021, he recalled spending $10 million on a former crypto company and lawyers. He said the lawyers taught him everything about securities and crypto laws, and he took those lessons to BitClout. “I learned a lot,” he said. “And I think I got it right this time.”
