Guest Post: Keeping Up with the Regulators
One of the many joys of working in web3 is the enthusiasm of young professionals, looking to learn what they need to learn to dive into this exciting and developing space. In that vein, I have the opportunity this semester to work with Christian Caprari (a current LLM candidate at the University of Cincinnati College of Law), as an extern with BSL Group, where he is working to support our clients by, among other things, researching emerging regulatory regimes, including the subject of this post - MiCA.
So, without further ado, I give you Christian:
Keeping Up with the Regulators
By: Christian Capari
The need for transparency in marketing is critical and oftentimes complicated. The use of celebrity endorsements to promote products and services is a common practice among businesses, and the cryptocurrency sector is no exception. Endorsement deals are an effective way to generate attention and interest in brands, but - as celebrities Kim Kardashian and Paul Pierce can testify - it is not without its risks.
The U.S. Securities and Exchange Commission (SEC) has been unapologetic in pursuing companies and celebrities, who engage in cryptocurrency marketing in violation of securities laws. The SEC has specific statutory provisions that prohibit individuals from promoting financial assets without properly disclosing
their endorsement relationships. Failure to comply results in harsh penalties.
On February 17th, former NBA star Paul Pierce settled with the SEC over cryptocurrency marketing violations. Pierce promoted EMAX tokens offered and sold by EthereumMax on Twitter without disclosing the payment he received for his promotional activities. Additionally, he made false and misleading statements about the EMAX cryptocurrency, including a screenshot of an account that showed large holdings and profits, although his own personal EMAX holdings were far less significant.
As a result, he violated Securities Act of 1933 Section 17(b) and 17(a)(2) and agreed to a three-year prohibition, as well as a civil monetary penalty of $1,150,000, with prejudgment interest and disgorgement.
Just like Pierce, the SEC charged Kim Kardashian with similar violations, alleging that she failed to sufficiently disclose her $250,000 deal to hype EMAX tokens on Instagram.
Chronologically, the last similar case occurred on March 22nd, when celebrities Lindsey Lohan, Jake Paul, Soulja Boy, Ne-Yo, Austin Mahone and others were charged by the SEC for illegally touting TRX and BTT (Tron and BitTorrent coins) without disclosing that they were compensated for doing so and the amount of their compensation.
With the exception of Soulja Boy and Mahone, the celebrities charged agreed to pay a total of more than $400,000 in disgorgement, interest, and penalties to settle the charges, without admitting or denying the SEC’s findings.
But market manipulation techniques are not new in the web3 space. In December 2022, seven influencers were charged by the SEC with securities fraud as they made used their popularity to promote cryptocurrencies they were holding with the intent to “dump” them when the new investors got involved, raising the value of those coins.
The lesson from all these cases is that individuals who promote and tout financial assets must disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.
It is important to point out that it is not just SEC regulations that companies and individuals need to be mindful of when promoting their brands. Additional state and federal regulations govern the ways in which businesses can lawfully promote their brands. For example, Section 5 of the Federal Trade Commission Act (FTC Act) prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce’’ like material misrepresentation, omission, or any practice that is likely to mislead a consumer acting reasonably in the circumstances.
In conclusion, the use of celebrity endorsements to promote goods and services can be an effective marketing tool, but it is not without its risks. As said, the regulators are multiple (SEC and FTC[LKD(5] ), but companies and individuals must comply with all applicable regulations. Failing to comply with these laws can and will result in significant penalties, like in Kardashian and Pierce’s case. Therefore, transparency and honesty in marketing are critical to avoiding potential legal issues and maintaining the trust of consumers in any industry, especially in a new and growing market like cryptocurrency.
What kind of lawyer would I be without a disclaimer?
Everything I post here constitutes my own thoughts, should only be used for informational purposes, and does not constitute legal advice or establish a client-attorney relationship (though I am happy to discuss if there is something I can help you with). I can be reached via email (dlopezkurtz@crokefairchild.com or david@bsl.group), telegram (@davidlopezkurtz), twitter (@lopezkurtz), and on LinkedIn here.
