The founder of once-hyped cryptocurrency startup BitClout is in trouble. The SEC on Tuesday charged BitClout founder Nadar Al Naji with fraud and an unregistered offering of securities, alleging that he used a false name to evade regulatory scrutiny while raising more than $257 million in cryptocurrencies.
BitClout, a decentralized social media platform, raised funding from blue-chip firms including a16z, Sequoia, Chamath Palihapitiya's Social Capital, Coinbase Ventures, and Winklevoss Capital. Many of these big-name investors participated in the company's roughly $7 million seed round, with Sequoia investing $1 million and a16z investing $3 million, according to sources close to the seed round at the time.
According to the SEC complaint, Alnaji, who goes by the online pseudonym DiamondHands, told investors that revenue from the platform's token, BTCLT, would not be used to pay himself or his employees. Instead, the SEC alleges that he spent more than $7 million on personal expenses, including a Beverly Hills mansion and gifts for family members. Alnaji did not respond to a request for comment. A source close to Alnaji said the mansion was used for business purposes, that several BitClout employees lived there, and that he hosted company-sponsored events at the home.
The complaint is the latest for the company, which has been the subject of controversy since its inception. Launched in 2021, BitClout was meant to be a social cryptocurrency exchange where users could buy and sell tokens based on people's reputations. It made waves and drew criticism after scraping 15,000 profiles from what was then known as Twitter and giving cryptocurrency tokens to celebrities. It essentially created a celebrity stock market, with the price of the token rising and falling depending on the person's popularity.
Public and legal backlash was swift. Brandon Curtis, co-founder of cryptocurrency firm Rio Network, served Al Naji with a cease and desist letter, claiming that BitClout had used his likeness without permission. Former Singaporean Prime Minister Lee Hsien Loong also publicly petitioned for his BitClout profile to be removed. “This is misleading and was done without my permission,” he wrote on Facebook.
At the time, many wondered why such a storied company would back such a controversial concept. Sources close to the company said Alnaji had earned credibility in the crypto world from his previous job at Basis. In 2018, the Princeton University graduate raised as much as $140 million to create a stablecoin. But Alnaji found the regulatory environment too unfriendly to cryptocurrencies and decided to return the money, sources said. Investors received about 93 cents on the dollar, according to a person close to Alnaji.
So when Alnaji approached investors with a new idea in early 2021, they were inclined to give him a second chance. According to sources close to the company, Alnaji raised a seed round with a loose pitch: a decentralized social media platform, without a focus on a social stock market. But then, in April, Alnaji said he intended to quietly test the stock market feature and lock it behind a password-protected webpage. The password was soon leaked, and the feature went viral, suddenly becoming Alnaji's major focus. This upset several investors, according to multiple sources. The company eventually went back on its original pitch and instead focused on the DeSo blockchain, a blockchain “built specifically for decentralizing social networks,” BitClout's website said.
Still, in the aftermath of the scraping debacle, many tech heavyweights publicly defended BitClout. Investors like a16z's Andrew Chen, Michael Arrington, and angel investor Shaan Puri pumped thousands of dollars into buying tokens on the platform. Chen wrote about BitClout's “very interesting approach” to incentivizing users with financial rewards in a post about the app, while Sequoia Capital's Sean Maguire praised Al Naji's “transformative vision” and called BitClout “instantly mind-blowing.”
The polarization between those outraged by unauthorized “trading” on BitClout and those defending the startup was further complicated by the fact that there was no CEO available to speak on its behalf. One of the key allegations in the SEC's complaint was that Al Naji's identity was hidden, and he made it appear as if BitClout had “no company behind it, just coins and code,” while the commission alleges he pocketed millions of dollars in profits.
“Al Naji mistakenly believed that being a decentralized, 'fake' company would generally confuse and discourage regulators from pursuing him, and he attempted to evade the federal securities laws and mislead investors,” SEC Enforcement Division Director Gurbir S. Grewal said in a statement released by the SEC. “He is clearly mistaken.”
Sequoia and a16z declined to comment.
Al Naji has yet to speak about the allegations, but he has previously expressed confidence in his company's legal position. At an event in late 2021, he reflected on his previous crypto company and how it ended up spending $10 million on legal fees. Those lawyers, he said, taught him all about securities and cryptocurrency law. Those lessons were carried over to BitClout. “We learned a lot. I think we made the right call this time,” he said.