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Digital Assets and Blockchain Technology

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Your Favorite Celebrity Has Been in the News Lately...But It's Not for Their Stardom

April 7, 2023

The rise of cryptocurrencies has led to an explosion in the number of initial coin offerings and other cryptocurrency promotions. This growth has also created an explosion in fraudulent activity and scams, which have cost investors millions of dollars.  As a result, regulators and investors are increasingly looking to hold promoters of cryptocurrencies accountable for their actions.  The recent FTX suit, Edwin Garrison et al. v. Sam Bankman Fried et al., in which several celebrities were sued by investors for allegedly endorsing and promoting FTX’s interest-bearing crypto accounts, is just one example.  There, 21 of FTX’s brand ambassadors were named. The U.S. Securities and Exchange Commission (“SEC”) has also taken action against celebrity endorsers, seeking to put its stamp and authority over the digital asset space.

It has long been accepted that endorsements must generally reflect the honest opinion or experience of the promoter.  In traditional financial markets, promoters can be held liable if they make false or misleading statements about a security, leading investors to make investment decisions based on inaccurate or incomplete information.  The same principles apply to crypto promotion, and promoters can be held liable if they make false or misleading statements about a cryptocurrency . . . but that’s not all.  As evidenced by the FTX suit, the celebrities were accused of engaging in deceptive practices when they appeared in advertisements for FTX and assured potential investors that FTX was a sound investment, representations investors now say were false. The allegations amount to a “pump and dump” scheme. While the brand ambassadors might have disclosed their partnership with FTX, the complaint alleges that they failed to disclose the nature and scope of their involvement with the now disgraced platform, the amount of compensation they received for their promotions, and that they failed to do due diligence for the products they were touting.  The plaintiffs now seek over $1 billion in damages, stating in part that the brand ambassadors played a major role in elevating the collapsed business.

While promotor liability in the crypto realm is an actively developing area of law, it has not stopped the SEC from taking a number of enforcement actions against cryptocurrency promotors in recent months.  Most recently, on March 22, 2023, a group of celebrity endorsers, including Lindsay Lohan and Jake Paul, agreed to pay a total of more than $400,000 in disgorgement, interest, and penalties to settle the SEC’s claims for illegally touting crypto asset securities Tronix ("TRX") and BitTorrent ("BTT") without disclosures of compensation.

It is indisputable that social media has become a leading source of sales and advertising for many industries, including cryptocurrency.  Given the lucrative nature of these opportunities, many celebrities have jumped at the opportunity for what may seem like easy money. With celebrities using their substantial followings on Twitter, TikTok, Instagram, among others, to push all manner of items, services and products, it is important to keep in mind that, and as several recent cases have shown, doing so without an understanding of the rules, can prove costly.  While most promoters must comply with the U.S. Federal Trade Commission’s ("FTC") Endorsement Guidelines, promotors pushing cryptocurrency investments may also be obligated to comply with the SEC’s requirements as well, certainly if they wish to avoid being subjected to investigation by the SEC’s enforcement arm.  Specifically, in an alert issued in November 2017, the SEC Division of Enforcement and the SEC’s Office of Compliance Inspections and Examinations warned celebrities that they must comply with the applicable federal securities laws when endorsing stocks and other investments, like cryptocurrencies.  In other words, using simple and clear language that a message is an “ad” or “sponsored” is not enough.  Promotors should be familiar with the following securities laws, among others, when endorsing cryptocurrency investments:

  • Section 17(b) of the Securities Act of 1933 (the “Securities Act”), which is known as the anti-touting provision, prohibits persons from promoting the sale of a security in return for an undisclosed past or future compensation. Simply put, the promotor must disclose the nature, source, and amount of the compensation for promoting the security.
  • Section 5 of the Securities Act requires all offers and sales of securities to the public to be registered with the SEC unless an exemption is available. Required disclosures include information about the company’s business operations, financial condition, management and risk factors.
  • Section 15 (a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) requires persons involved in effecting securities transactions to register with the SEC as a broker-dealer or a person associated with a broker dealer.
  • Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, known as the anti-fraud provisions, prohibit fraudulent and deceptive conduct in connection with the offer and sale of securities, including the failure to disclose material information that a reasonable person would consider important in making an investment decision. These provisions prohibit the dissemination of misleading statements when promoting cryptocurrencies.

Thus, simply disclosing you received compensation is only the tip of the iceberg should you wish to dip your toes in these icy SEC waters.  It is important for promoters to understand their disclosure obligations and their associated responsibilities when promoting products and services, including the added risk when promoting cryptocurrencies.  If you have any questions about the issues discussed in this article, please contact the attorneys in Riker Danzig’s Digital Assets and Blockchain Technology practice group.

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Hunt S. Ricker

Hunt S. Ricker

Labinot Alexander Berlajolli

Labinot Alexander Berlajolli

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