While cryptocurrency remains a new concept for many investors across the globe, more and more people are becoming familiar with the digital asset class. This is not only a result of the constant drumbeat of crypto-related headlines in the media, but also because of the personalities touting the potential for riches from Bitcoin, Ethereum and the like.
In fact, a much younger audience of would-be crypto tycoons is being reached by virtue of the individuals being paid to advertise digital coins and exchanges. These include TikTok stars such as the D’Amelio sisters and Tana Mongeau, who have been retained to endorse cryptocurrency to their millions of followers. Even Kim Kardashian West has jumped on the bandwagon. She has posted ads for Ethereum Max—a speculative digital token created by unknown developers—on her Instagram stories, and these have been viewed tens of millions of times.
Given what appears to be a modicum of crypto endorsement mania, those in the limelight doing the promoting must be well aware of potential legal exposure as a result of oversight by the U.S. Securities and Exchange Commission.
The SEC Is Watching
The SEC has had its eye on cryptocurrency endorsements for years now. Back in 2018, boxing champion Floyd Mayweather and celebrated music producer DJ Khaled settled charges levied by the SEC for failing to disclose promotional payments from three Initial Coin Offering issuers, including Centra Tech Inc. For his part and among other things, DJ Khaled touted Centra as a "Game changer." Not to be outdone, Mayweather hyped Centra’s ICO by telling his Twitter followers, “Get yours before they sell out, I got mine…"
The cases against Mayweather and Khaled were the first to charge promotional violations involving ICOs. In the end, the two agreed to pay a combined total of $767,500 in disgorgement, penalties and interest as a result of their undisclosed endorsement deals. Of note, their unlawful promotion of the ICOs came after the SEC issued a report in 2017 suggesting that altcoins may be characterized as securities subject to federal securities laws, including the applicable anti-touting provisions of the Securities Act of 1933.
Why it Matters
Pursuant to Section 17(b) of the Securities Act, potential investors must be able to discern whether an endorsement has been paid for or is coming from a disinterested party. Clearly, Mayweather and Khaled crossed the line by not disclosing their financial interest in promoting the ICOs they peddled, which drew the scrutiny of the SEC.
Influencers now endorsing crypto products should learn from their mistakes. They should also pay heed to ongoing SEC messaging. In a recent tweet, the SEC stated, “Social media influencers are often paid promoters, not investment professionals,” and “the securities they’re touting…could be frauds.” This language is not at all subtle, and the takeaway for celebrities and influencers is that the SEC will continue to stridently pursue the issue of paid endorsements and related disclosures.
Bottom line: talent and social media mavens alike should be cautious when considering attaching their names to any security offerings, including those involving crypto. It is incumbent upon them (and their representatives) to do their due diligence; thoroughly vet the digital assets or exchanges they may promote; consult with legal professionals about the weight of SEC scrutiny and the possibility of exposure for violating securities laws; and always disclose any financial incentive they may receive for their endorsements.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.