Celebrity Crypto Fines Flag Lessons for Lawyers

In speeches, studies and reports, regulators around the world have continued to signal that they are looking at cryptocurrency assets and social media influencers. A recent settlement between the Securities and Exchange Commission and Kim Kardashian highlights that more enforcement action may be on the horizon.

The settlement should be taken as a warning to social media influencers and their lawyers.

SEC Disclosure Rules for Endorsements

Based on their specific design, some cryptoassets meet the definition of a security and some do not. Celebrity endorsements of cryptoassets usually require a disclosure that the celebrities are being paid to make the endorsements.

Crypto-assets that meet the definition of a security require additional important disclosures and assessments regarding risk and suitability for individual investors when they are advertised.

In a recent case where the defendants sought to protect themselves from liability under the Privacy Act for their online videos and social media posts, the United States Court of Appeals for the Eleventh Circuit reversed a lower court’s decision to grant a motion to dismiss and dismissed the case. for further proceedings.

The Court of Appeal firmly found that these communications corresponded to their mass communication predecessors, such as newspapers and radio advertisements. Therefore, those who market securities on social media are potentially liable under Section 12 of the Securities Act.

First and foremost, creators and marketers need to understand whether the cryptoasset being marketed can be considered a security, and should be very careful if the answer is even “maybe.”

There are some additional issues to consider that could be red flags for regulators and plaintiffs.

Eligibility and Disclosures: Avoid mass marketing of a crypto asset that could be considered a security. In addition to disclosing endorsements and existing positions, marketers should understand the potential civil and criminal liability for mass marketing a security. There is no way to determine the suitability of a crypto asset for an individual investor if it is mass marketed.

Targeted ads: Directly related to determining eligibility and providing appropriate disclosures, outsourcing advertising or relying on posts to be distributed by algorithms written by third-party marketing agencies exposes companies and influencers to the risk that those posts will be put in front of someone who is not suitable for it specific security.

Naming Crypto Assets: Consider whether the security that is created and marketed could cause confusion with other established products.

Fear of missing out and extreme prices: Be careful with extremely priced, that is, very cheap crypto-assets. When celebrities and influencers post about cryptoassets they inevitably create a fear of missing out.

Extreme pricing of certain cryptoassets further fuels these fears. For example, when an asset is priced at one millionth of a penny, it is easier to daydream about the astronomical real dollar return that would in reality seem unrealistic or impossible if the same asset were priced at one penny.

A share priced at one krone must rise to $1,000,000 per share for it to have the same return as an asset priced at one millionth of a krone rising to just one dollar.

It’s hard to imagine a security that has a price per share approaching $1,000,000, but it’s easy to dream of the one-dollar security continuing to grow to $100 or $1,000. Furthermore, such extremely priced crypto-assets are potentially more vulnerable to market manipulation, and can be used by fraudsters to generate greater returns.

The days of the unregulated crypto asset, be it a value or a commodity, are coming to an end. Caution is advised when creating and marketing cryptoassets, because regulators are not only watching these markets, they are taking enforcement action.

FTC Guidance for Endorsements

The Federal Trade Commission’s Endorsement Guides (not formal regulations), originally issued in 1980, simply require disclosure of a “material connection” that might affect the weight or credibility with which consumers give the endorsement.

In 2019, the FTC released guidance specifically aimed at social media influencers. The agency offered the guidance in the context of social media and celebrity endorsements.

The following terms and hashtags – used to identify or organize topics in social media – are ambiguous and should not be considered sufficient disclosure of the material connection: “Thank you” #collab #sp #spon #ambassador.

The FTC says, “Don’t rely on disclosures that people will see only if they click on ‘more.'” A hyperlink labeled “Disclosure” or “Legal” in a post “is probably not sufficient.” It does not convey the importance, nature and relevance of the information it leads to…”

Placement of the hashtag is important. Don’t just add “ad” to the end of a hashtag with your business name, because there’s a good chance consumers won’t notice and understand the meaning of the word “ad” at the end of a hashtag.

Differences between FTC and SEC rules

The FTC’s endorsement guidelines simply require a disclosure of a “material connection” between the endorser and the company or product. Violation of the Guidelines may result in a civil action by the FTC for violation of Section 5 of the FTC Act. These actions typically result in consent agreements where the defendants agree to injunctions and ongoing audits for 10 or 20 years.

In contrast, the SEC mandates disclosure of the “nature, scope and amount of compensation” related to the endorsement. Unlike the FTC, the SEC has both civil and criminal jurisdiction.

Companies wishing to engage influencers or celebrities for marketing purposes should incorporate compliance with federal FTC and SEC requirements into their contracts, but should also monitor the behavior of influencers related to the company’s offerings.

Not only should you keep an eye on what the influencer is doing on the public pages or posts, but also include in your contract that you must be a member or friend, or otherwise be allowed to see all of the “private” pages or messages.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Paul Guirguis is an associate at Norton Rose Fulbright.

Sue Ross is a senior advisor at Norton Rose Fulbright US, and is a member of the FinTech team.