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SEC Charges BitClout Founder Nader Al-Naji with Fraud; Says Proceeds Were Used to Pay for Los Angeles Mansion, Gifts
The founder of the once-hyped cryptocurrency startup BitClout is facing trouble. On Tuesday, The SEC has accused BitClout founder Nader Al-Naji is facing charges of fraud and unregistered securities offering, alleging he used a pseudonym to avoid regulatory scrutiny while raising more than $257 million in cryptocurrency.
BitClout, a decentralized social media platform, grown up among a group of prominent companies, such as a16z, Sequoia, Chamath Palihapitiya’s Social Capital, Coinbase Ventures, and Winklevoss Capital. Many of these large investors were present at the company’s roughly $7 million seed funding round, with Sequoia investing $1 million and a16z investing $3 million, according to sources familiar with the seed funding round at the time.
The SEC’s complaint alleges that Al-Naji, known online as “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 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 hosting company-sponsored events at the home.
The lawsuit is the latest for a company that has been no stranger to controversy since its inception. When it launched in 2021, BitClout was supposed to be a social crypto exchange where users bought and sold tokens based on people’s reputations. It made headlines and received criticism for removing 15,000 profiles from the company then known as Twitter and attaching crypto tokens to celebrities. Essentially, it created a stock market 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 cryptocurrency firm Rio Network, to hit Al-Naji with a cease and desist letter, claiming that BitClout used his image without consent. Lee Hsien Loong, the former Prime Minister of Singapore, even made a public appeal demanding that his BitClout profile be removed. “This is misleading and done without my permission,” he wrote on Facebook.
At the time, many wondered why such reputable companies would back such a polarizing concept. Sources close to the company explained that Al-Naji had earned a good reputation in cryptocurrency circles after his previous company, Basis. In 2018, the Princeton graduate raised a whopping $140 million to create a stablecoin. But Al-Naji soon after realized that the regulatory environment was too inhospitable for cryptocurrencies and decided to return the money, these sources said. Investors received back about 93 cents on the dollar, according to a person close to Al-Naji.
So in early 2021, when Al-Naji approached investors with a new idea, they were inclined to give it a second chance. Al-Naji raised his initial funding round on a broad pitch for a decentralized social media platform, with no emphasis on a social stock market, according to sources close to the company. But then in April, Al-Naji intended to quietly test the stock market feature, locked behind a password-protected web page. The password quickly leaked, and the feature went viral, suddenly becoming a huge focus for Al-Naji. That upset several investors, according to multiple sources. The company eventually went back to its original pitch, instead focusing on its DeSo Blockchain, a blockchain “purpose-built to decentralize social networks,” according to the BitClout website.
However, in the immediate aftermath of the scraping scandal, many tech bigwigs publicly defended BitClout. Investors like Andrew Chen of a16z, Michael Arrington, and angel investor Shaan Puri have invested thousands of dollars in token purchases on the platform. Chen posted on BitClout about a month after launch, writing about how the app has a “really interesting approach” by incentivizing users with financial rewards. And, in a post by Shaun Maguire of Sequoia Capital, The investor praised Al-Naji’s “transformative vision” and called BitClout “instantly electrifying.”
The polarization between those angry at being “traded” on BitClout without their permission and those defending the startup was further complicated by the fact that there was no CEO to speak to on behalf of the company. Al-Naji’s hidden identity is a major element of the SEC’s complaint, which alleges he made BitClout appear as if there was “no company behind it…just coins and code,” when he was supposedly pocketing millions in profits, the commission alleges.
“Al-Naji attempted to evade federal securities laws and defraud the investing public, mistakenly believing that ‘being ‘fake’ decentralized generally confuses regulators and deters 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 mistaken.”
Sequoia and a16z declined to comment.
While Al-Naji has not yet commented on the allegations, he has previously expressed confidence in his company’s legal standing. In an event at the end of 2021reflected on his previous cryptocurrency company and how he spent $10 million on lawyers. The lawyers, he said, taught him all about securities and cryptocurrency law, lessons he brought with him to BitClout. “I learned a lot,” he said. “And I think we got it right this time.”