Exclusive: Chen Weixing plans to sue Binance after failing to reach an agreement on valuation. Zhao Changpeng strongly responds to “Four No’s and Four No’s”?

What is the truth behind the several cases surrounding Binance’s equity dispute?

At 10 pm on August 31, a post on Chen Weixing's WeChat Moments attracted attention. He said that he only spent 5 minutes to decide to invest tens of millions of RMB in Binance. Three years later, the company's annual revenue was tens of billions and its profit was hundreds of millions of US dollars, but the founder delayed giving shares for three years.

He also said that the contracts, payment records, and chat records were all complete, and that it would cost tens of millions in lawyer fees to sue. Chen Weixing told Wu Blockchain that he was currently preparing materials to sue Binance.

This post on WeChat Moments started to ferment after being spread by Li Xiaolai.

In response to this, Binance co-founder He Yi said: Binance's token investors and shareholders have all received high returns, and we are grateful to Mr. Li Xiaolai for his continued attention to Binance. We reserve the right to pursue legal responsibility for Li Xiaolai's negative remarks about Binance and CZ personally on social media.

On September 1, Chen Weixing said in his WeChat Moments: The company he founded follows the principle of "no confirmation of ownership, no entity, no financial statements, no rights, no dividends, no currency distribution, no repurchase, and no transfer". On this basis, shareholders are requested to resolve the issue through "fair commercial negotiations". If there is any "slander" of the company, don't blame the company for being rude. This "he" is suspected to refer to Zhao Changpeng, and there is also a saying that the "four no's and four no's" are Zhao Changpeng's requirements for lawyers. Chen Weixing also told Wu Blockchain that because the equity invested in Binance has not been confirmed and transferred, many top overseas funds have paid deposits but cannot purchase it.

Zhao Changpeng’s “Four No’s and Four No’s” did not receive a response from Binance, and it is impossible to determine the authenticity of this response. It is just a negotiation strategy. In fact, Binance also proposed a repurchase plan.

Several people familiar with the matter confirmed exclusively to Wu Blockchain that investors such as Chen Weixing entered Binance around July 2017, when Binance was founded. Binance provided investors with a cash buyback in installments as a solution for exiting. He Yi told Wu Blockchain that as an unlisted company, Binance's equity investors can exit in cash.

The problem lies in the valuation. It is reported that Binance is only willing to give a valuation equivalent to its annual profit (500-1 billion US dollars) for installment repurchase, and investors cannot transfer the ownership of shares or enjoy profit dividends.

However, most other equity investors accepted Binance’s alternative plan (some say it was to exchange equity for BNB), because these investors have their own industry layout. As Binance’s influence becomes more and more widespread, they have to compromise in order to obtain Binance’s support in ecology and listing. Chen Weixing has already withdrawn from the cryptocurrency circle and is not constrained by this, so he chose to take action.

Wu Blockchain learned that in July 2017, the valuation given by Binance during its financing was less than 500 million yuan. Chen Weixing said that he invested tens of millions and should hold 5%-10% of the shares.

What is the current market value of Binance? It is indeed difficult to value a non-listed company. Generally speaking, it is based on the valuation amount in the last round of financing or the valuation of similar companies in the industry. According to the former, Binance is in favor; according to the latter, referring to Coinbase, which is valued at US$8 billion, it is in favor of early investors.

In addition to equity investors, there are two other public cases surrounding the disputes at the beginning of Binance's establishment.

The first is the dispute with Sequoia Capital, the world's largest venture capital firm. According to financial reports, on August 25, 2017, Sequoia and Binance reached an investment letter of intent and subsequently signed it. Sequoia invested RMB 60 million in Binance and loaned RMB 30 million, accounting for 10.714% of the shares, with a valuation of approximately RMB 500 million. On December 14, Binance said that Sequoia's valuation was too low.

Sequoia then took Binance to court, protesting that Binance had violated the "exclusive" clause by negotiating investments with a third party other than Sequoia. On December 27, Sequoia applied for an injunction prohibiting Binance from negotiating with other investors, and the Hong Kong court approved the injunction. However, on April 24, 2018, the Hong Kong High Court announced the revocation of the injunction in the first-instance judgment.

The difference between Sequoia and the aforementioned investors such as Chen Weixing is that Sequoia only signed a letter of intent (TS) instead of an investment agreement, and did not make any payment, so the lawsuit based on the "exclusive" clause is more of a deterrent. Investors such as Chen Weixing not only signed the investment agreement and made payments, but some even became shareholders in the legal sense.

Interestingly, some of the investments that Sequoia’s “investment ban” helped to ruin may have also allowed Binance to retain more equity. In the end, Binance only accepted strategic investment from Vertex Investments, a subsidiary of Singapore’s “state-owned enterprise” Temasek, more to have a “backer” for its local office.

Another public case is that Zhang Li, the former head of Huobi Business, accused Zhao Changpeng of not paying the consultant fees promised and written in the white paper. After Chen Weixing posted on WeChat Moments, Zhang Li said: In 2017, Zhao Changpeng's 1CO raised one thousandth of the tokens for dozens of consultants (each), except for Bao Erye, who cashed out in disguise, the others were left in silence. Of course, this " only has voice and records ", and there is no legal contract. He Yi's response to this was "Excuse me, is there a contract?" and "Can we go through legal procedures?"

It can be seen that when Binance was founded in 2017, it was indeed impossible to predict that it would develop so fast. In addition, CZ and He Yi were relatively young and had limited financial resources (it has been reported that Zhao Changpeng began to bear family expenses since he was a teenager). Therefore, a large amount of equity and platform coins were given at a lower valuation in the early stage. Who knew that the industry would begin to develop rapidly beyond imagination a few months later.

When Binance raised funds in July 2017, the price of Bitcoin was over 2,000 US dollars. Binance was in financial difficulty and even had to borrow money from Sequoia. Four months later, in November, the price of Bitcoin soared to 11,000 US dollars. In addition, Binance's valuation skyrocketed after it received 94 users of competing products. As a result, many disputes arose.

A similar thing actually happened to Bitmain. In 2016, Bitmain was valued at $1 billion and signed TS with IDG, Sinovation Ventures, Sequoia, and New Horizon. In 2017, the valuation skyrocketed, and Bitmain no longer needed money, but it still completed the corresponding investment with a valuation of $1 billion.

Industry veterans expressed two different views on the dispute involving early investors such as Chen Weixing.

One view is that it is indeed unreasonable to not allow transfers and repurchase at low prices in installments. However, it is not easy for investors to sue legally because the entities of cryptocurrency companies are very vague, especially companies like Binance that advocate distributed offices. We cannot confirm which overseas entity Binance used to sign contracts with investors in the first place, and whether there are restrictive clauses in the contract.

Another view is that both investors and consultants only invest money, or image, and do not pay much. The founder of the exchange bears the most important responsibilities, obligations and even huge risks of the company's operation. The company's rapid growth has brought huge profits, and investors seem to have to make some concessions. The logic of some traditional investment industries is not completely applicable.

The two sides are still in negotiations and the possibility of compromise in the future cannot be ruled out.