This Crypto Treasury Claims It Raised $401 Million. The Real Amount Is $13.7M

Transcript

Hi everyone. I'm here with Stephen Erlick, executive editor of Unchained. Welcome Stephen. >> Yeah. Hey Laura. >> So this week you published a story about a DAT called Zero Stack and the findings of your investigation were a little bit eyepopping. Go ahead and explain what it is that you discovered about this stat. In the world of of that, especially since we're now moving away from the Bitcoin and Salana and and these ones into longer tail assets, ears perk up for signs of I guess like marketing tricks, accounting tricks, um essentially ways that projects and companies try to make um their fundraisers appear to be more successful

than they actually are. Um we were given a tip to look at this project in particular. We actually got a copy of the investor deck that is sent to potential PIPE investors. And uh one of the things that really stood out to us right away was that the vast majority of the money that was being contributed into this debt and they actually launched about last week or so um with a big topline number saying that they raised $41 million. It turned out that over 300 million of that came from tokens um zerog tokens that are sort of the native token for a blockchain focused on AI called zero gravity that were donated essentially by the founding

team uh which already is is a red flag. Um two the blockchain had not even launched yet when they created all this. That's a first in this digital asset treasury world. But I think what really stood out first, and we can get into some of the other red flags a little bit later, was that of the $41 million that was uh ostensibly invested, only 13.7 million actually came in new cash from new investors. Uh the balance came from about 22.8 million worth of Salana uh in kind tokens from another DAT company called um the DeFi Development Corporation. um essentially almost recycling those tokens. I don't know if

uh now both projects are claiming they have their tokens on their balance sheet. That might be something worth looking into further on, but those were sort of given to them given to this uh zero stack company. Um it's going to pay an 8% APR with a convertability feature for DeFi Development Corp. So they're basically getting sort of like a like a free call option on this that stock if it does go up. But really the the top finding we found is that they said that they raised $41 million. But in actuality u the real number of new money that came in unencumbered was only 13.7 million which was about 3% a little over 3% of what they claimed they had brought in.

>> Yeah. I mean, when you um kind of broke down all the various buckets of money, um then it was very clear that yeah, this was um not really new money um except for that 13.7 million. You also spoke to a number of investors and they said that this deck raised a number of red flags aside from the accounting gimmicks. What were those red flags? So, I mean, Flag number one, uh, I already alluded to it once, the fact that this was a treasury company that was sort of focused on a blockchain that just went live on mainet. Um, blockchains by the very definition, by the very definition are already pretty experimental and very

risky investments. Uh, anyone in this industry that takes itself seriously or takes themselves seriously would say that even for Bitcoin or Ethereum or Salana. But this was already risky. Uh two, the decentralized AI sort of ecosystem which is about a 20 to2 billion sort of vertical right now is still at its infancy. Uh and they're trying to compete with the likes of Open AI and and uh etc. So risk number two. But then again, the fact that the biggest risk and that the biggest red flag that really came out of this is that multiple people told me this seemed to be almost a loophole for these founders to get immediate liquidity for their tokens. And that's not something

that's supposed to happen. As many people listening here probably know, um often like founder tokens, early investor tokens are um subject to lockups. It's almost like putting those tokens in escrow where they might vest after a one-year cliff and then quarterly or or monthly or whatever. And they serve the dual purpose of of constricting supply in order to keep token prices potentially higher and then two keeping these the teams the key individuals engaged in the projects over the long term. They want to align incentives, but u the tokens that these founders were putting into this DAT were locked, but in exchange, they're getting shares issued against those tokens that will become immediately liquid as soon as those tokens get registered with the

SEC. So, they don't they're not going to have to wait years for liquidity. They're they could theoretically sell in as little as 3 to 6 months. And that was another major red flag that uh one uh one industry expert that has looked at dozens perhaps more than hundred of these DAT decks uh said that that was something that the industry needs to fix. Um, I've done, as you know, Laura, I've done many reports and investigations into that over the last few months and, uh, the ones that are more responsible that they put out in their investor presentations that founder shares, founder tokens, like that type of stuff will be locked up for periods of time, three, six, sometimes a full year to sort of calm investor

fears. In this particular deck, um, there was nothing of of that sort. I didn't see anything in any of the SEC filings. And when I reached out to zero stack and representatives for comment on the story before we published, I did not receive a response. >> And what happened to the token after the DAT launched or not the token, the stock? >> Well, the stock everything has been going down. I mean the the the token first launched uh I guess it was the 21st of September or so. Uh the stock the token is down about 53% since then.

So like that already highlights the riskiness of it. It's actually down about 30% since we published the story yesterday. Um the the stock is down about I think 22% or so and and 7% so far today. Uh so again and and this actually leads to red flag number two that was pointed out to me as well. Zerog um has a circulating supply or a total supply I guess of 1 billion tokens. And for a project that's brand new and a token that is not trading, how do you come up with a price? The reason that the these insiders were able to put quote unquote 300 plus million dollars into the um into the DAD was because and it actually said this in the SEC filing,

the company and the token holders basically came to an agreement that they're going to price the tokens at $3 each. Um that essentially gives a project u for a blockchain that again has not launched yet or at that point had not launched. It launched two days later a $3 billion um fully diluted valuation. And it it certainly seems like there could be some insider dealings happening here because the company and the u the token holders they they would be aligned. They'd want the tokens to trade well. $3 is a nice number. So they basically agreed um they basically agreed to price them at this at this amount and away we go. Um the to actually spoke to a couple of experts to

to get a sense of whether or not there was any funny business going on when the token actually began to trade um working with market makers or any sort of like uneconomic type wash trading to maintain the price. Uh I was told that uh there were no telltale signs of that from initial price charts on on uh Binance and Bitnet, which were the two big exchanges it started trading on. But again, the price has consistently gone down down down since it began trading. And uh that $3 price point, uh if it can't get back to it quickly, it might look a little ridiculous in a couple months time.

>> And so how would you say this whole story fits into the current debt environment? Again, it it just that's our that's um they had their moment. I'm not going to suggest that they're going to go away, but now we're looking at froth. I mean, one investor I spoke to said that all the serious investors are pencils down at this moment. Um like a lot of the smart money got in in the spring, early summer, and now we're seeing a lot of the the the copycats, the ones that are trying to find that pocket of I guess hype that they can profit off of. oftentimes that involves moving into what we call like the the longtail assets, the ones that are not as well known. Uh the ones where there's not as much competition in the space.

And if you can try to catch fire um great I mean there's actually another DAT focused on an AI blockchain called um interactive strength that we wrote about a few months ago and that one has just been completely tanking. it was tanking before it turned itself into a treasury for this um feet token, but it stayed that way. Uh so there's going to be a lot of this coming up and um it it just I guess for me it's just another example of maybe this is calling the top a little bit and uh we're going to move into a period of perhaps some cons consolidation. Uh we're I know we're seeing a lot of DATs now engaging in stock buybacks as a way to sort of I I don't know if artificially is the right

word but as a way to support the price especially as some of the MNAVs are starting to um as especially now as some of the MNAVs are starting to drop sometimes below one uh like for instance um um VC Ramwami's group Strive actually recently purchased Semilar Scientific which had been a bit of a bleaguered Bitcoin treasury company that's also a medical advice firm. So, I think we're going to continue to see um these are the big trends I think we're going to see. We were making a joke, I think, Laura, that uh um I was talking to somebody, it might have been you, that all the investment banking firms that made money sort of brokering these DAT deals are now going to make money um sort of speed um being matchmakers and

and and opening speed dating events between the different uh debt companies as they try to consolidate and and build stronger balance sheets. Yeah, honestly this whole thing about how they launched the DAT even before the blockchain went live, like it's just giving me kind of peak 2017 ICO mania or even 2018 when it was like full-on just scams at that point. Um, all right. So, what do you think investors should do when they're evaluating these stats to protect themselves? >> Yeah, the most important thing that investors can do is is really just make sure you read the fine print. uh like if you if anyone Googles zero stack or anything surrounding this uh this

particular debt, you'll see a series of articles um from from the crypto press and also some some mainstream financial outlets um touting this $41 million raise. And uh if you don't read anything else, you'll be like, "Oh, $400 million AI blockchain. That sounds pretty good." And uh and again, like we wrote the story. We're not accusing anyone of like fraud or or doing something illegal, but it it's really important to read SEC filings, read the fine print so you understand exactly how much money is being put into these things and what are the potential conflicts of interest or risk factors that aren't going to be uh immediately apparent or displayed through press releases and and other

articles. Uh it frankly it didn't take super long for for us to read these and and realize that the actual amount of money put in was a little over $13.7 million. So like it's just really important again to always do your own research especially during times like this where again we might be reaching a bit of a market top in terms of the hype train when it comes to these DATs and when we're talking about projects and blockchains that are still um very new and and experimental. It's it's all the more important to do that work. The one other thing I would point out though is is again uh I know people there are some people I spoke to and this didn't quite make into the article that are trying to dis disassociate the zerog blockchain or

the sorry the zeroravity blockchain from the data itself. The DAT has some very peculiar um economics for for lack of a better term. But there are some people that still think that the zeroravity blockchain if you take out the data and just look at it look at it as an early experimental type of of uh of AI focused blockchain could still um be successful. But uh they they certainly they seem to think that some of the uh some of its reputation is is tainted by a little bit of the insider dealing from the the founders that are putting money into the stat. And then again the uh some of the revelations from our story that we ran by them.

>> Yeah. Um by the way you said that the actual cash raise was a little over 13.7 but it was a little under 13.7 million. It was 13.66. So um yeah from 401 million that they claimed to 13.66 million. Um I ra eyebrow raising story. Thanks so much for your work, Steve, on um uncovering that so people can kind of learn more about this world and hopefully um put their money in vehicles that um you know don't don't have kind of like these accounting tricks and and whatever in them.

>> Thanks so much. [Music]