Napster (formerly Infinite Reality) CEO John Acunto
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On November 20, at approximately 4 p.m. Eastern time, Napster held an online meeting for its shareholders; an estimated 700 of roughly 1,500 including employees, former employees and individual investors tuned in. That’s when its CEO John Acunto told everyone he believed that the never-identified big investor—who the company had insisted put in $3.36 billion at a $12 billion valuation in January, which would have made it one of the year’s biggest fundraises—was not going to come through. In an email sent out shortly after, it told existing investors that some would get a bigger percentage of the company, due to the canceled shares, and went on to describe itself as a “victim of misconduct,” adding that it was “assisting law enforcement with their ongoing investigations.”
As for the promised tender offer, which would have allowed shareholders to cash out, that too was called off. “Since that investor was also behind the potential tender, we also no longer believe that will occur,” the company wrote in the email.
At this point it seems unlikely that getting bigger stakes in the business will make any of the investors too happy. The company had been stringing its employees and investors along for nearly a year with ever-changing promises of an impending cash infusion and chances to sell their shares in a tender offer that would change everything. In fact, it was the fourth time since 2022 they’ve been told they could soon cash out via a tender offer, and the fourth time the potential deal fell through. Napster spokesperson Gillian Sheldon said certain statements about the fundraise “were made in good faith based on what we understood at the time. We have since uncovered indications of misconduct that suggest the information provided to us then was not accurate.” The company declined to comment further for this story. In separate cases, the Securities and Exchange Commission and Department of Justice are looking into the company and what happened to the investment, respectively; the company is not the target of the latter. (The SEC investigation was originally looking into the company’s $1.85 billion valuation as part of a reverse merger scrapped in 2022, but it is ongoing and could well have broadened in scope. An SEC spokesperson wrote that the agency “does not comment on the existence or nonexistence of a possible investigation.” The DOJ has not yet returned a request for comment.)
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While Napster is now alleging it is a victim, Forbes raised concerns about both the investor and the firm months ago. It all started in January when the company, then called Infinite Reality, reached out to Forbes announcing its $3 billion financing round. It emailed again on February 11, this time pitching Acunto, who then had a 12% stake in the Boca Raton, Florida-based company, as a “prime candidate” for Forbes’ billionaires list. Facing an audience at a live event in Los Angeles in February, he exhorted: “Do you really think that we would talk about $3 billion dollar investments and be one of the largest companies in our space if we really weren’t doing what we’re doing?” In that call he also boasted about how much wealth the company had created for its shareholders. “We have over 600 millionaires,” Acunto claimed.
That’s when Forbes began looking into the company and discovered that all was not as it seemed. There was a string of lawsuits from creditors alleging unpaid bills, a federal lawsuit to enforce compliance with an SEC subpoena (now dismissed) and exaggerated claims about the extent of their partnerships with Manchester City Football Club and Google (per Forbes’ previous reporting). The company also touted “top-tier” investors who never directly invested in the firm, and its anonymous $3 billion investment that its spokesperson told Forbes in March was in “an Infinite Reality account and is available to us” and that they were “actively leveraging” it.
The convoluted history of Napster dates back to 2019 when Acunto bought a bankrupt social media company Tsu. That entity, in turn, merged with, or acquired, at least a dozen (some tiny, some struggling) metaverse, virtual reality, drone and AI companies largely paid for in all-stock mergers at higher and higher valuations. By then known as Infinite Reality, it acquired Napster in March for $207 million and rebranded itself, using the much higher-profile name, in May.
On the day Forbes published its first story about Napster’s questionable funding round, Napster put out a press release claiming to reveal the investor’s identity as advisory firm Sterling Select, citing overwhelming media attention as the reason it did so. Sterling Select is a separate entity from Sterling Equities, the firm that invests the assets of former New York Mets majority owners Fred Wilpon and Saul Katz; the only common owner is David Katz, a partner of Sterling Equities who cofounded Sterling Select. But here it gets even more confusing: Sterling Select was not in fact the “investor”—but instead introduced Napster to other “investors” who in turn wrote the checks, Napster’s chief marketing officer Karina Kogan told Forbes. (The company later amended its press release to reflect that Sterling Select was not the investor.)
Several shareholders told Forbes that by May Acunto had upped the ante, telling them that they would soon be able to sell their shares at $20 a pop, thanks to the mystery investor. That would put the firm’s valuation at $18 billion, and mean it was valued at 240 times its 2024 revenue—50% higher than it claimed even in January. Outwardly it continued on with its business, pushing a pivot to AI away from the metaverse and picking up at least three more companies in part using its stock as currency.
But as the weeks passed, few signs of a big investor emerged. No one could cash out (though a couple of lenders made a big enough fuss to get some money back). More lawsuits alleging nonpayment were filed including one in June in which original owners of virtual reality company Obsess, a company Napster bought in January, claimed they still hadn’t been paid the $22 million they said Napster owed. Napster alleged in a counterclaim that Obsess was the one to “cook its books” and that it bought the company based on allegedly false financial information, which Obsess denied. The case is ongoing. In another case, Sony sued Napster in August for $9.2 million in damages stemming from allegedly unpaid royalties and other fees. (Napster didn’t respond; a clerk filed a certificate of default in October.)
Then came a big round of layoffs in July. An estimated one-third of the staff, or according to one laid-off employee, 100 people, mostly developers, were let go. That person also questioned the hype around some of the product announcements while they were at the company, describing them as “ChatGPT word salad.” In a text message to Forbes at the time, spokesperson Gillian Sheldon explained that the layoffs were the “result of workforce redundancies stemming primarily from the acquisitions we’ve made over the past 18 months … we continue to employ hundreds of full-time team members around the world.” In September, Napster’s chief legal officer Jennifer Pepin and chief financial officer Brian Effrain left the company, according to their LinkedIn profiles. Pepin didn’t respond to a request for comment; Effrain confirmed he is no longer at Napster but declined to comment further.
All along, Napster appears to have been scrambling to raise cash to keep the lights on, working with brokers and investment advisors including a few who had previously gotten into trouble with regulators. Cova Capital, which says it represented the mystery investor, previously got in trouble with broker-dealer watchdog FINRA for recommending private share sales to retail investors without “conducting due diligence sufficient to form a reasonable basis to believe that the offerings were suitable for, or in the best interest of, at least some investors.” FINRA also alleged that Cova, led by CEO Edward Gibstein, didn’t do enough to make sure the issuer actually had the rights to the shares or determine how much the shares had been marked up; Cova paid a fine in March “without admitting to or denying the findings.” Cova employee Vincent Sharpe had also paid fines to settle three customer disputes for allegations of misrepresentation of information and unsuitable investment recommendations at a previous firm; he denied wrongdoing. Laren Pisciotti, who was charged by the SEC for her role in perpetrating an unrelated $120 million fraud scheme last year, appears to have helped Napster raise funds, including short-term, high-interest loans in 2024. Pisciotti, through her lawyer, declined to comment. It’s not clear how many more investors signed on or if any of the above individuals were involved, it apparently raised an estimated tens of millions in additional capital after announcing the $3 billion investment.
If it turns out that Napster knew the fundraise wasn’t happening and it benefited from misrepresenting itself to investors or acquirees, it could face much bigger problems. That’s because doing so could be considered securities fraud. If the company is “ lying to the investor to induce the investor to buy securities … that would be fraud,” says startup lawyer Patrick McCloskey, who is not involved in the case. He emphasized that it depends on whether the funds were on the balance sheet, whether the company believed the funds were really under their control and other factors related to what Napster knew and what it intended.
The one thing that’s certain is that this mystery has not been solved.
