How bitcoin miner Layer1's pitch deck could spell legal trouble

A pitch deck from Peter Thiel-backed bitcoin mining startup Layer1 may have misled investors about the makeup of its “founding team.” If true, it could have legal ramifications for the firm, which is seeking to define the United States as a more powerful base for global bitcoin mining operations.

The pitch deck, which The Block acquired in 2019, stated that Liu Xiangfu, co-founder of Canaan Creative, was a “founding member” and part of the San Francisco-based startup management team. But Liu tells The Block that he is just “friends” with the Layer1 team and is not involved in its business.

"[I'm] not associated with [Layer1 in] any capacity," said Liu. "I never join[ed] the team or business."

Layer1 has also confirmed this. "There is a disconnect with regards to Liu Xiangfu's involvement with Layer1," Alexander Liegl, CEO of Layer1, told The Block. "Xiangfu has been a good friend, and supportive of the company since the very beginning. It should be no surprise to anyone who follows our business to see Xiangfu's name connected with Layer1."

In October, multiple media outlets (including The Block) reported that Layer1 had raised $50 million from venture capitalists including Peter Thiel. The Block has confirmed that Layer1 was still in the process of raising money for this round as late as January 2020. Two legal sources say that if any investors relied on the misleading pitch deck to make their decision, it could be grounds for a lawsuit. The Securities Act of 1933 prohibits “misrepresentation” in the sale of securities.

“A misrepresentation is a misrepresentation. If an investor relied on a misrepresentation and suffered damages, it is likely actionable,” said David Silver, founding partner at crypto-focused law firm Silver Miller.

The situation has parallels with an episode involving Canada-based crypto investment firm NextBlock Global. In May 2019, the SEC imposed a cease-and-desist letter on the company and fined CEO Alex Tapscott $25,000. The SEC said that in addition to selling unregistered securities, NextBlock falsely advertised to investors that several prominent figures in the blockchain space were advisors to the project.

As it turns out, it’s also not completely true that the firm raised $50 million. In fact, an SEC filing submitted in October 2019 shows that Layer1 raised only $23.6 million of the targeted $50 million.

According to BnkToTheFuture, Layer1 raised a total of $41.39 million via its Series A as of January 2020, and raised $2.1 million in a seed round in December 2018. Liegl confirmed to The Block that this information is accurate.

"Layer1 has never officially announced any funding, however we're aware that there's an unfortunate misperception out there about what we've raised." He declined to comment on why the firm did not correct this misperception.

Layer1 is now raising another $50 million via secured debt. "Since we have the containers up and running, we are pursuing debt funding to scale the operation without equity dilution," said Liegl.

The firm wants the U.S. to control the majority of bitcoin's hashrate, which is currently dominated by China, which accounts for 65%. Layer1 itself wants to control around 30% of bitcoin's hashrate.

Currently, the company operates its mining centre in Texas, and it designs and manufactures its mining equipment with proprietary cooling technology meant to, to combat the  state's high temperatures. The Texas mining centre is currently in the process of scaling up to a full 150 megawatts by the end of the year, Liegl said recently in a private ask-me-anything chat session with investment platform BnkToTheFuture.

That would amount to roughly 5% of the total hash rate. Jakov Dolic, one of Layer1’s founding members, who has now left the firm, added that Layer1's goal is to "scale up to let's say 1.5 to 2 gigawatts within realistically two years from now and this would mean something like 30% of the total hashrate."