North American mining company Layer1 is suspected of false advertising and may face legal action

Original source: The Block

Original article by Yogita Khatri and Frank Chaparro

Translator: Azuma

Layer1, a North American cryptocurrency mining company backed by PayPal co-founder and well-known venture capitalist Peter Thiel, is suspected of misleading investors about the "founding team" in its financing materials. If the fraud is true, it could bring serious legal consequences to the company.

Layer1 stated in its 2019 business plan that Liu Xiangfu, the former co-founder of Canaan Creative, was a "founding member" of the company. However, Liu Xiangfu himself denied the news and explained that he and the Layer1 team were just "friends" and were not involved in the company's business.

Liu Xiangfu said: "I have no (contractual) relationship with Layer1. I have never joined this company."

Layer1 also confirmed this. Alexander Liegl, the company's CEO, said: "There are some misunderstandings about the relationship between Liu Xiangfu and Layer1. Liu Xiangfu has always been a good friend of mine and has supported Layer1 from the beginning. Anyone who has done business with us is not surprised to see Liu Xiangfu's name associated with Layer1."

Last October, multiple media outlets reported that Layer1 had completed a new round of financing of $50 million through investors including Peter Thiel. However, the fact is that Layer1 was still trying to complete this round of financing before January this year. Two legal sources said that if any investor made a decision based on misleading promotional materials, this could be grounds for the investor to file a lawsuit because the Securities Act of 1933 explicitly prohibits false statements in securities sales.

“Distorting the facts is fraud,” said David Silver, founding partner of Silver Miller, a law firm specializing in cryptocurrency. “If investors suffer losses due to false statements, they may file a lawsuit for this.”

This situation is similar to that of Canadian cryptocurrency investment company NextBlock Global. In May 2019, the U.S. Securities and Exchange Commission (SEC) issued a warning to the company and fined its CEO Alex Tapscott $25,000. The SEC stated that in addition to selling unregistered securities, NextBlock had falsely advertised to investors that several blockchain industry celebrities were consultants for the project.

It turns out that the news that Layer1 raised $50 million was also inaccurate. A document submitted to the SEC in October 2019 showed that Layer1 had only raised $23.6 million of its $50 million financing target at the time.

According to BnkToTheFuture data, as of January 2020, Layer1 has raised a total of $41.39 million through Series A financing. Prior to this, the company had also completed a $2.1 million seed round of financing in December 2018. Alexander himself confirmed this data.

“Layer1 has never officially announced any funding, but we are aware that there are some misunderstandings about the specific amount of funding we have raised,” Alexander said.

Meanwhile, Alexander declined to comment on why the company had not corrected the misunderstanding.

Layer1 is currently seeking to raise another $50 million in debt security. Alexander said: "Our boxes are ready to be deployed and we are currently seeking debt financing to scale our business without diluting our equity."

Layer1's ambition is to help the United States control most of the computing power of the Bitcoin network. Currently, Bitcoin's computing power is dominated by China, accounting for as much as 65%.

The company currently operates a mining center in Texas, USA, and uses proprietary refrigeration technology to design and manufacture mining equipment. Recently, in a private conversation with investment platform BnkToTheFuture, Alexander said that the Texas mining center is currently working to expand its business and strive to reach 150 megawatts of electricity consumption by the end of the year.

If this is achieved, Layer1 will account for about 5% of the total computing power of the Bitcoin network. Jakov Dolic, one of the founding members of Layer1 who has left, added that Layer1's goal is to expand its scale to 1.5 to 2 gigawatts within two years, which is about 30% of the total computing power of the Bitcoin network.