One of the reasons why SatoshiVM became one of the hot projects in the first half of 24 years was the "farce" caused by KOL.
In January 2024, SatoshiVM issued the token SAVM for the first time. Due to the advance promotion by many KOLs who cooperated with it, the price of SAVM tokens has risen since the date of issuance. Shortly after the release, its price has reached $11.66. But soon, it was disclosed that the KOL received the tokens from the project party and sold them immediately, which caused great controversy and caused the price of the currency to fall all the way. According to the transaction data on June 12, 2024, the lowest transaction price of SAVM within 24 hours was $2.07, which is no longer as glorious as it was back then.
In fact, the cooperation between crypto projects and KOLs has long been one of the default marketing channels in the industry, and the concept of KOL round financing has been derived from this. However, KOLs participating in the KOL round face many legal issues, especially after the project they participate in has experienced strong market fluctuations.
Therefore, today, Attorney Mankiw will talk to you about the topic of crypto KOL rounds - what is the KOL round? What are its legal risks? How to avoid these risks?
KOL and KOL Wheel
1. What is KOL?
KOL (Key Opinion Leader) literally means a person who has more and more accurate product information, is accepted or trusted by relevant groups, and has a greater influence on the purchasing behavior of the group.
The KOLs in the Web3.0 field are essentially a group of cryptocurrency influencers who have rich investment experience or gold-digging awareness and have accumulated a certain number of fans. They have greater exposure because they receive a lot of attention, and the information they publish will be seen by more people.
As "experts" in the Web3.0 field, they do not have to accumulate a certain number of fans to be called KOLs. Even KOLs with only 5,000 fans have the opportunity to receive promotion invitations from project parties and receive certain rewards through project promotion.
There are generally two ways for KOLs to earn income: the first is to receive immediate compensation, which is the general way for Internet celebrities to attract advertising, such as the common Giveaway KOL or NBA star promotion on X; the other is to act as a project investor, using their influence as "equity technology" or directly participate in the investment, and after the project launches the token, receive or purchase the project token at a discount as an investor or early contributor.
2. How to understand the KOL cycle?
The KOL wheel is actually the second form mentioned above. The reason why it is expressed differently is because of the different perspectives.
From the perspective of project financing, some cryptocurrency startups use equity to raise venture capital, while some companies raise funds by selling their own tokens or affiliated tokens. Of course, there are also companies that raise funds through mixed financing rounds that mix tokens and equity.
The KOL round refers to the project party inviting KOLs to promote and also taking them as financing targets. Unlike other financing targets, KOLs, as early contributors to the project, can usually get a certain discount when purchasing the project party’s tokens, or even get free token allocation.
In April 2024, RootData, a Web3.0 asset data platform, released a statistical data on KOLs’ participation in project financing in the past six months, among which Dingaling ranked first with participation in 21 project financings.
It is worth noting that from the list, the proportion of NFT players is relatively high. One possible reason is that the NFT market has been performing poorly in recent years. Therefore, NFT project owners and KOLs also need to seek new growth points and breakthroughs to further stimulate market operations. The linkage between project owners and KOLs may be one of the reasons why NFT players have flocked to the primary and secondary markets in large numbers.
What legal issues should KOLs pay attention to?
1. Regulatory developments related to KOL rounds
In my country, based on the Advertising Law, Code of Conduct for Online Anchors, and the Guiding Opinions of the State Administration of Market Regulation on Strengthening the Standardized Management of Online Live Broadcasting, traditional KOLs need to clearly disclose the entrusted promotion relationship between themselves and the brand in text or video promotions, and are subject to relevant supervision. For example, if a KOL inserts a product promotion in a video, it is necessary to mark the video as an advertisement when publishing it. However, in the crypto industry, China currently has no targeted legal support.
However, in the United States, according to a written KOL financing contract revealed by Bloomberg, KOLs who invest at a discount must promote the project through long-form podcasts and TikTok videos; and, KOLs must disclose their relationship with the project when promoting the project.
At the same time, KOL's crypto promotion will also be reviewed by the U.S. Securities and Exchange Commission. For example, in October 2022, Kim Kardashian was found to have violated relevant U.S. regulations because she did not disclose her agency relationship with the project party when promoting a project token, and was investigated and charged by the U.S. Securities and Exchange Commission.
However, in practice, it is usually difficult for outsiders to know the relationship between project owners and KOLs and the internal transaction model. Moreover, not all project owners or KOLs will disclose their internal relationships with each other. Therefore, unless there is an "informed person" who reveals the information, it is difficult for relevant departments to obtain information about the KOL round, and it is often difficult to regulate the KOL round.
(II) False advertising suspected of fraud
As Web3.0 surfers, many investors know that even if KOLs only take money to advertise and do not participate in project financing, people cannot fully trust KOLs’ exaggerations about a project. Following this line of thought, once KOLs purchase or intend to purchase project tokens and invest in the project, the authenticity of the project information they feedback is even more questionable.
According to some industry insiders, few KOLs can make truthful statements in their promotions, and their statements are often mixed with vague, ambiguous or even completely false content, with the intention of misleading investors into buying project tokens.
In fact, the half-truth and half-exaggerated propaganda of KOLs poses legal risks of civil fraud or even criminal fraud. According to Article 148 of the Civil Code, if the KOL's false statements lead investors to buy tokens or participate in projects due to misunderstandings, thus causing property losses, then the KOL's behavior constitutes civil fraud and investors have the right to claim compensation.
What is more serious is that if the KOL has the intention to illegally occupy the investors' property and uses deceptive means to enable the project party to obtain the investors' funds, which ultimately causes the investors to suffer property losses, then the KOL's behavior is very likely to violate the crime of fraud stipulated in Article 266 of the Criminal Law and bear criminal liability.
3. Risks of Illegal MLM
According to the above statement, the cooperation model between KOL and project parties usually lacks transparency, and it is difficult for the outside world to know the specific way in which KOL obtains project tokens. However, if the KOL's token allocation is linked to the number of investors who successfully promote, and the KOL promotes in his own paid community, then this practice may be suspected of illegal pyramid selling activities.
Judging from the definition of the crime of organizing and leading pyramid schemes in Article 224 of my country's Criminal Law, the main elements of pyramid schemes under the criminal law are: collecting "entry fees" + paying compensation on a "per capita basis" + inducing and coercing participants to continue to develop others to participate, and forming a hierarchical structure of more than three levels.
Therefore, if the KOL meets these requirements when promoting a project, that is, collecting community membership fees, obtaining token rewards based on the number of investors developed, and enticing investors to continue to develop downlines to form a hierarchical structure of three or more levels, then the KOL's behavior may constitute the crime of organizing and leading pyramid selling activities and will bear criminal responsibility.
4. Risk of being identified as an accomplice to a criminal offense
Recently, the ZKasino project has aroused widespread concern about the risks of KOL project promotion. The project owner issued a document in March 2024 to launch a fund pledge activity.
Multiple KOLs participated in ZKasino's KOL round of financing, and promoted the project through Twitter, crypto community forums, offline events and other channels, and obtained corresponding token rebates and investment discounts.
However, after more than one million users participated in bridging more than 10,000 ETH, the ZKasino project team unilaterally changed and deleted the official website activity description. Not only did they fail to return the users' staked ETH as agreed, they also forced all users' ETH to be converted into platform tokens.
This behavior caused great controversy, and some KOLs who participated in financing and publicity were also strongly questioned and condemned by fans after the project was accused of "soft rug" (running away with the money). They were accused of transferring benefits and should bear corresponding criminal responsibility as "accomplices."
Like the KOL in this incident, many KOLs often believe that their actions of promoting projects and selling project tokens at high prices are just normal commercial investment behaviors when promoting projects. They have nothing to do with the project party and they do not need to be responsible to users.
However, success or failure is also due to the same person. KOLs can gain profits from the surge in the value of project tokens, but there is a great possibility that they will be implicated if problems arise with the project and face serious legal risks.
If the project party is involved in a criminal scandal due to reasons such as fundraising methods and project content, and the KOL plays an obvious role in promoting and publicizing the project involved, then according to Article 25 of the Criminal Law of the People's Republic of China, the KOL is likely to be deemed to have known or should have known the insider information of the project party and be charged by the judicial authorities and held accountable.
Some senior KOLs have realized this risk and started to take self-protection measures. For example, KOL 0xKillTheWolf shared on Twitter the reasons why he refused to participate in the ZKasino KOL round, including doubts about the project valuation and revenue data, and distrust of the founder's character. This cautious attitude is worth learning from for other KOLs.
KOL round is not so good
From the above legal risk analysis, it can be seen that when KOLs participate in the KOL round of financing for Web3.0 projects and conduct promotion and publicity, they should pay attention to the following points to avoid misleading investors and preventing themselves from being involved in criminal cases:
Conduct comprehensive due diligence and risk assessment on the project to understand key information such as the project's operating model, profit model, development prospects, and potential risks;
When promoting a project, fully disclose your interest in holding the project’s tokens;
Avoid false propaganda about projects and refuse to abuse influence to manipulate the market.
Some KOLs may think that they are not subject to my country's judicial supervision because they are abroad or promoting overseas projects. This idea is a bit taken for granted. According to the relevant provisions of my country's Criminal Law, as long as the criminal act or result occurs in my country or the KOL is a Chinese national, my country has jurisdiction.
Finally, Attorney Mankiw suggested that KOLs in the Web3.0 field should be cautious when carrying out any promotion and be responsible to investors. Only in this way can the professional value of "key opinion leaders" be brought into play and contribute to the healthy development of the Web3.0 ecosystem.
