SEC struggles to keep up with Kim Kardashian and crypto

What did Kim do wrong?

Kim Kardashian’s $1.26 million crypto-related settlement yesterday with the SEC was designed to get maximum exposure. Instead of just a dry press release, although the agency did release one of those, Chairman Gary Gensler announced the settlement on social media and even posted an influencer-style video warning the public about crypto investment schemes and scams. One of the many questions raised by the settlement that Gensler did not address in the video: Was it fair?

The matter was not as clear as the SEC made it seem. Kardashian got into trouble for sharing a promotional message about EthereumMax, an obscure crypto token, with her more than 330 million followers on Instagram. But it wasn’t as if Kardashian was openly trying to flout the law. She included in the post a disclaimer that she was not giving financial advice, as well as the hashtag #AD, an FTC-approved indication that the post was a paid ad. The SEC said the disclosure did not comply with a decades-old agency rule governing the promotion of investment opportunities. Kardashian’s big mistake: She left out when and how much she was paid — $250,000 — to promote the token.

Erik Gordon, a professor at the University of Michigan’s Ross School of Business, says the Kardashian cache no doubt had a lot to do with the SEC’s decision to go after her. “Part of what you do as a regulator is punish the person, but what you also do is bring cases that will have the overall effect of scaring people away from doing the same thing,” Gordon told DealBook.

The settlement raises issues for other crypto endorsements. Crypto companies spent millions last year on ads during the Super Bowl, many of them featuring celebrities, including Matt Damon and Tom Brady. Could these ads lead to SEC investigations? The SEC declined to comment on whether it was pursuing cases against other celebrities.

The SEC says it targeted Kardashian because she illegally promoted a specific security. Damon and Brady, on the other hand, may be off the hook because they have backed exchanges where you can trade crypto, not individual investments. But yesterday’s enforcement muddies the picture. Apparently, the SEC is sending the message that promoting something like EthereumMax, which we now know it defines as a security, requires an increased level of disclosure. But what about Michael Saylor and Elon Musk, two prominent promoters of Bitcoin and Dogecoin respectively? Wouldn’t the Kardashian rule apply to them too?

Going after Kardashian has generated a lot of questions. Thousands of commentators flocked, for example Gensler’s Twitter post about the settlement criticizing him for the agency’s scattershot enforcement approach to crypto campaigns and promoters.

All the attention was like rocket fuel for EthereumMax. The token has risen more than 12 times in the past 24 hours, to trade at a near six-month high. Zoom back and it’s down more than 90 percent from the time of the infamous Kardashian EthereumMax Instagram post.

HERE’S WHAT HAPPENS

The White House will limit Chinese tech firms’ access to some chips. In the coming days, the Biden administration is expected to announce new measures that would limit the ability of AI and supercomputer companies in China to access American high-tech equipment and software. The move expands on a similar Trump-era rule.

Meta is reportedly downsizing in New York. The firm plans to get out of the lease for its Park Avenue South office space, Bloomberg reports, as it continues to consolidate its Manhattan presence. Last week, Mark Zuckerberg, Meta’s CEO, told employees the company would freeze hiring and cut budgets across most teams as the ad-dependent firm prepares for a major economic downturn.

Credit Suisse bounces back. Shares returned to a two-week high, climbing more than 5 percent this morning, as investors await details of the bank’s turnaround plans, which are expected to be revealed this month. European stocks and US futures are higher this morning as well.

The British pound and government bonds are rising. Kwasi Kwarteng now intends to publish a fiscal plan, ahead of schedule, explaining how the country will cut debt while pursuing pro-growth policies. To head off a major party revolt, Liz Truss’s government yesterday backed away from controversial plans to cut taxes on the nation’s wealthiest earners, which had roiled markets and drawn widespread criticism from her own Conservative party.

Treasury unveils new fund to support small businesses. Partners include JPMorgan Chase, the WK Kellogg Foundation and Hyphen, a non-profit focused on equity in access to capital. The fund will use a portion of the $1.9 trillion U.S. bailout to support small businesses, ensuring that “communities of color, rural areas and others who have difficulty accessing capital are able to get that financing they need,” Treasury Secretary Janet Yellen said.

How risky is crypto?

The cryptocurrency market poses a threat to the broader financial system unless it is subjected to better regulation and enforcement, according to US officials charged with overseeing systemic risk after the 2008 financial crisis.

The Financial Stability Oversight Council, a group of regulators led by the Treasury Department, warned in its first major report on the sector that “while interconnections with the traditional financial system are currently relatively limited, they could potentially increase rapidly.”

Recent volatility in crypto highlights the need for action, a Treasury spokesman said. In May, the collapse of algorithmic stablecoin Terra led to a downward spiral in prices, leading to a rash of crypto bankruptcies that left many investors unable to access their assets.

Washington wants better visibility. Crypto companies “do not have a consistent or comprehensive regulatory framework and may engage in regulatory arbitrage,” the report said.

Regulators also want to create new rules for how crypto exchanges and platforms can expand. Many companies add services by acquiring intermediaries, without facing the same limits on overlapping businesses that apply to the traditional financial sector.

The report fills regulatory gaps. Officials, including Treasury Secretary Janet Yellen, hope the report will serve as a guide for lawmakers and regulators as they develop a more comprehensive regulatory framework for crypto markets.

Industry observers such as Eswar Prasad, a professor at Cornell University and author of “The Future of Money,” see the report as an important step, as it recognizes the increasingly centralized nature of an industry that promotes decentralization, and provides some of the clarity that blockchain companies has called for. “It certainly moves us forward,” Prasad said.

Poshmark no longer wants to go it alone

Poshmark, the online second-hand retailer, said yesterday that it was acquired by NaverSouth Korea’s largest Internet company, for approximately $1.2 billion DealBook approached our colleague Jordyn Holmanwho covers all things retail for The Times, to break down the deal.

The acquisition gives Poshmark a foothold in Asia, where online shopping is booming. It will also add 36 million monthly users from Naver to Poshmark’s 80 million registered users. And Naver has a growing business in “live sales,” where sellers auction off their products in a live stream, giving Poshmark another outlet for distribution. Investors greeted the deal coolly, sending Naver shares down nearly 9 percent this morning.

Poshmark seems to need a partner. The retailer’s stock has fallen 81 percent since it went public in January 2021. The biggest problem: The bottom line, which has continued to sink into the red. Changes to Apple’s privacy policy have also disrupted Poshmark’s ability to target potential customers. Finally, the second-hand market, where Poshmark is big, has become increasingly crowded, as rivals also chase consumers who are drawn to closing lower prices at a time when concerns about inflation and sustainability are rising.

Other combinations may follow. Dealers Warby Parker and Rent the Runway, like Poshmark, went public during the pandemic, only to see their shares weaken since. If Poshmark proves that pairing is the way to go, expect other online retailers to follow suit.

“Which @elonmusk do you like best?”

— Volodymyr ZelenskyUkraine’s president, asking his 6.7 million Twitter followers which Musk they prefer – the one who supports Russia or the one who supports Ukraine. This after Musk asked his Twitter followers to vote on a “peace plan”, with a controversial option to cede Crimea to Russia.

Company boards have sharp “blind spots”

Corporate directors may feel overconfident in their ability to deal with 21st-century challenges such as climate change or cyber security, PwC’s annual board survey suggests. This year’s report includes a section on executive “blind spots” to show what is widely missed at a time when shareholders and consumers expect more engagement from companies than ever before.

Here are some of the findings that stand out for Maria Moats, who heads PwC’s Governance Insights Center:

• Eleven percent of the approximately 700 board members surveyed believe that environmental competence is an important competence for their board. Moats sees this as problematic at a time when the SEC and global regulators are demanding more environmental disclosures.

• About 45 percent of survey participants see a connection between environmental, social and governance principles and corporate performance – a relatively low number, Moats believes, as ESG grows as a focus for shareholders and stakeholders.

• About 60 percent of board members said that a non-CEO board member met with shareholders during the year, and 90 percent rated the experience as productive.

SPEED READ

Offer

• John Curtius, one of Tiger Global’s most prolific dealmakers, is leaving the firm. (FT)

• DE Shaw is reportedly planning to increase performance fees for its three largest hedge funds to as high as 40 percent. (Bloomberg)

• Two SPACs run by serial blank check entrepreneur Bill Foley plan to liquidate and return money to investors. (Reuters)

• Vodafone said it is in talks to merge its UK wireless business with a rival, CK Hutchison’s Three. (guardian)

Policy

• President Biden pledged $60 million in aid to Puerto Rico after Hurricane Ian, promising the commonwealth would get “every dollar.” (NEW)

• Allegations of fraud on the payment service Zelle are expected to exceed $255 million this year, up from $90 million last year, according to a report released by Sen. Elizabeth Warren of Massachusetts. (NEW)

• Donald Trump sued CNN for defamation in federal court, demanding $475 million in damages. (NEW)

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