Bitmain Fooled Investors with Promise of Backing From Russian Billionaire Fund

Bitmain Technologies, Ltd., the leading maker of cryptocurrency mining software and hardware, made false claims in at least two different versions of pitch decks that solicited money from US and Chinese investors, potentially violating domestic and international securities laws and risking legal backlash from parties who viewed the misrepresentations during funding negotiations.

The pitch decks misled pre-initial public offering round investors into thinking that Bitmain had secured a financial commitment from Digital Sky Technologies Global in a previous investment timeline when, in fact, DST Global had never invested in Bitmain.

One version of the pitch decks wrote that Bitmain had "recently completed a $400 million Series B round of financing from Sequoia Capital, DST, GIC, etc. with a pre-investment valuation of $12 billion," and the other version stated that Bitmain had "raised another $400 million at a $12 billion valuation from investors such as Sequoia China, GIC and DST in a Series B round."

So did a third copy that has been circulating on Twitter with phrasing closely mirroring that of the first deck, but the authenticity of this version has not been verified by CoinDesk.

In all three pitch decks, an image of DST Global's logo was also attached next to logos for Sequoia Capital and GIC Limited on the slides presenting the above-quoted text, further contextualizing the investors that had been involved at each stage of funding.

CoinDesk learned about the inaccuracy of the statements after publishing an article on Bitmain's forthcoming IPO. Jan Wootten, a senior vice president at Rubenstein — the public relations agency that represents DST Global — notified CoinDesk by email that "DST Global did not invest in Bitmain" and asked for a correction to the article's mention of DST Global as a Bitmain investor.

Josh Lindsfor, a managing director at DST Global, confirmed Wootten's findings and denied that the firm had invested in Bitmain for any round of funding.

DST Global is the Hong Kong headquartered private equity and venture capital firm founded by Russian-born billionaire Yuri Milner as the investment arm for his Russian web company Mail.Ru Group. Through DST Global, Milner has invested in numerous technology giants like Facebook, Twitter, Spotify, WhatsApp, Alibaba, Airbnb and Xiaomi in their infancy.

Last fall, The New York Times reported that some of the underlying assets in Milner's Facebook and Twitter investments had been sourced from Kremlin money funneled through shell companies.

DST Global, in response to The New York Times article, issued a statement distancing Russian investors from portfolio companies' day-to-day operations and board decisions. Wootten, in her inquiry, had also requested that CoinDesk remove all references to DST Global as an entity of "Russian" geographical origin and affiliation in historical and future articles.

Milner has personally invested in the New York real estate investment platform Cadre started by Jared and Joshua Kushner four years ago. Before his term in the White House and his marriage to first daughter Ivanka Trump, Jared had worked in real estate development with his father, Charles Kushner, in the greater New York City area.

The Trump administration, which employs Jared as a senior adviser to his father-in-law and US President Donald J. Trump, is currently under state and federal investigation for interactions with the Russian government that may have broken campaign finance laws during the 2016 presidential election.

Technology companies have since been placed under increasing scrutiny for doing little to prevent foreign agents from supposedly influencing political discourse on social media websites.

Legal repercussions

Two weeks ago, CoinDesk discovered that SoftBank Group and Tencent Holdings had not invested in Bitmain, contradicting reports that had surfaced in Chinese media and were traced to "IPO Zhao ZiDao," a QQ News outlet that covers IPOs across the Asian continent.

Despite accusations from a vast segment of the cryptocurrency community that Bitmain was responsible for the claims, it is unclear who had spoken with "IPO Zhao ZiDao." Its author "Uncle C" has refused to comment on his sources, and the claims were not published in official investor documents of knowledge.

This latest lapse concerning DST Global, however, can be directly linked to Bitmain's executive team, which had approved the wording of the pitch decks before sending them off for investors to review, according to sources familiar with the matter.

That could spell trouble for Bitmain in Hong Kong, where the company is based.

Under Hong Kong law, Ashurst LLP legal counsel Hoi Tok Leung said, the false claims constitute "fraudulent or reckless misrepresentation" if Bitmain made them "for the purpose of inducing another person to enter into an agreement," punishable by up to 7 years in prison, HK$1 million in fines and partial or full monetary damages in investor claims.

Government jurisdiction is not limited to where overseas companies have set up shop and "the SEC is likely to pursue anyone they believe is fraudulently seeking to raise capital from US investors" as well, argued Timothy Peterson, a financial technology law partner at Murphy & McGonigle and former senior counsel at the SEC Division of Enforcement in Washington, DC.

Unless the company that produced the erroneous claims "had a reasonable good faith reason to believe the information to be true at the time," Peterson said, then "the use of materially false or misleading information in an investor deck" amounts to charges of "fraud" in the eyes of US law, generally speaking.

That would implicate Bitmain in regulatory oversight here at home as much as it does abroad. The Bitmain IPO article published by CoinDesk relied in part on a version of a pitch deck that had been seen by an US investment banker and an US technology entrepreneur, although they did not end up investing in the company.

An US venture capitalist who saw the other version of the pitch decks and asked not to be identified, on the other hand, did invest in Bitmain and feels "unsettled" enough by the discredited claim to consider pursuing legal action against the company within the civil and criminal court systems. The US venture capitalist, while making the investment, was under the impression that DST Global was a Series B investor.

Bitmain, according to a term sheet forwarded to CoinDesk by a Chinese investor, had been raising $1 billion for the pre-IPO investment round being pushed by the pitch decks.

Whether or not the US venture capitalist will succeed on the legal measures, if taken, remains to be seen. Intent can be difficult to prove in cases of fraud, but a lawsuit or an enforcement action could pave the way for discovery of correspondences between Bitmain staff personnel to find out if the factual discrepancy plainly asserting DST Global's financial support had been left by accident or on purpose.

To investors like the US venture capitalist, Bitmain has yet to retract the misstatement.

Going public

Bitmain was established in 2013 by mainland Chinese natives Micree Zhan and Jihan Wu, the CEO, to integrate application-specific integrated circuit (ASIC) chips into cryptocurrency mining rigs with the aim of out-competing existing devices that minted new bitcoins. Miners perform complex mathematical computations to crack cryptographic codes and retrieve cryptocurrencies from distributed digital ledgers known as blockchains.

Some of the mining rigs — branded Antminers — are set aside at the outset of production for use throughout the company's in-house mining farms, with locations in the US, China, Europe and the Middle East. In addition to bitcoin, Bitmain has been diversifying into alternative coins such as ethereum, litecoin, bitcoin cash and siacoin.

This energy-intensive process requires that miners sync up to a mining pool, or a remote Internet cloud server, to search, move and store mined coins into digital wallets. Bitmain operates three of the biggest mining pools in the world — BTC.com, AntPool and ViaBTC — and self-allocates a cut of the coins mined on their networks in the form of transaction fees.

In the last year alone, Bitmain has raked in billions of dollars from sales of mining equipment and management of mining pools and farms, and it is now investing in other blockchain companies and expanding into the fields of robotics and artificial intelligence. The most recent $1 billion investment round valued Bitmain at $15 billion after the company hit its 5-year mark, making it one of the fastest-growing cryptocurrency companies and startup unicorns.

But the DST Global snafu comes at a much more critical moment for the company and industry, far beyond the scope of a massive funding round. Bitmain has been gearing up for an $18 billion IPO that it expects to file in September and complete a listing on the Hong Kong Stock Exchange for public trading by the beginning of next year. The market capitalization is being valued at somewhere between $40 to $50 billion, according to investor documents.

An early face of bitcoin, backed by high-profile investors with the exception of DST Global, would essentially be dealing with allegations of fraud as it plans to go public with possibly one of the soon largest IPOs of all-time, an irony not lost on the cryptocurrency sector's already tenuous reputation for stretching the truth with investors.

"Aside from discussions regarding regulatory requirements, there are increasing discussions and consensus in the cryptocurrency community regarding the need for greater professionalism and better communication," Leung of Ashurst LLP explained. "This appears to be a prime example of such a situation, as well as an example of how existing laws and regulations in the securities and contracts spaces can be applied to cryptocurrency-related situations."

Just last week, the North American Securities Administrators Association announced that it had opened more than 200 cryptocurrency investigations in the US, Canada, Mexico, Puerto Rico and the US Virgin Islands, 70 of which are actively underway.

In March, the US Securities and Exchange Commission reportedly subpoenaed 80-something individuals and businesses for suspicious activities associated with initial coin offerings (ICOs), a type of crowdfunding that transacts in cryptocurrency and cryptocurrency-like financial assets.

The information requests are rumored to have pressed on regulatory compliance and promotional legality. A study published last month by Statis Group, a cryptocurrency research and advisory firm, identified approximately 80 percent of ICOs conducted last year to be fraudulent.

In an industry rife with scamminess and rule-breaking, apparently even a long-time player can find itself caught in the cross-hairs of having its credibility called into question, and this incident will no doubt fuel widespread skepticism that the public has held towards cryptocurrency and blockchain technologies for reasons concerning legitimacy and trustworthiness.

"Investor decks are frequently reviewed very closely by business and legal teams for misrepresentations, for the above reasons — this does not appear to have been done here," Leung said.

Bitmain did not respond to requests for comments.

Screenshot of Bitmain's website via Bitmain's public Facebook photo album

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