The SEC is Cracking Down on Celebrities' Initial Coin Offering Endorsements

Paris Hilton has repeatedly made her love of cryptocurrency known on social media, as has Floyd Mayweather. Leading up to the Mayweather, McGregor fight this summer, Mayweather, himself, was busy posting sponsored content on his social media accounts. Such posts largely consisted of the promotion of an Initial Coin Offering (“ICO”) – an unregulated means of crowdfunding via cryptocurrency that enables startups to bypass traditional financiers and raise money directly from anyone – for a startup called Hubii Network. Ads for the company, which describes itself as a “Blockchain-based Decentralised Content Marketplace,” appear on Mayweather’s Instagram, which boasts nearly 19 million followers.

The socialite/DJ and boxing champ are not alone in endorsing various ICOs. Actor Jamie Foxx has promoted the token sale of Cobinhood, a free cryptocurrency trading exchange, on Twitter this fall. He joins rapper The Game, DJ Khaled, Donald Glover, and Ashton Kutcher, among others, who have taken to posting such promotions in recent months. According to a recent report by The New York Times, thanks to such celebrity endorsements of token sales, often lead to ICOs that raise as much as hundreds of millions of dollars. 

Given such increased activity within this sphere, the U.S. Securities and Exchange Commission (“SEC”) is stepping in. The government organization – which us tasked with enforcing federal securities laws, proposing securities rules, and regulating the securities industry, the nation's stock and options exchanges, and other activities and organizations, including the electronic securities markets in the U.S. – stated on Wednesday that such promotions may run afoul of federal securities laws in the U.S., unless the promoting parties disclose how and how much they were paid to make the endorsement.

[Note: That goes above and beyond what the Federal Trade Commission ("FTC") requires for sponsored posts. The FTC merely requires that material connections between an advertising party and influencer or celebrity be disclosed by way of language, such as #Ad or #Sponsored. It does not require them to disclose the terms of their deals.]

The SEC said in a statement: “Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments.  These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”

The independent agency of the federal government further stated, “Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.  A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.”

While such “celebrity endorsements may appear unbiased,” according to the SEC, they are more likely “part of a paid promotion.” The government entity warns, “Investment decisions should not be based solely on an endorsement by a promoter or other individual.  Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.”

This appears to be the beginning of what might turn out to be formal action on behalf of the SEC, which asserted on Wednesday that it “will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws.”