The U.S. Securities and Exchange Commission has said celebrity endorsements of initial coin offerings could be illegal if it not disclosed that the personalities were compensated. The warning marks an effort from the commission to address what has become a recent trend.
In a statement Nov. 1, the SEC’s Enforcement Division and Office of Compliance Inspections and Examinations said celebrities and others who promote a virtual token or coin that is a security must disclose the nature, scope and amount of compensation they received in exchange for the promotion.
ICOs, in which participants send digital currency like Bitcoin in exchange for digital tokens, have become an increasingly popular way for startups to raise money, raising more than $3 billion. The SEC this summer issued a report which found the currencies sold in ICOs may be securities.
The regulatory warning comes on the heels of a New York Times report about celebrity endorsements of token sales and the legal grey area the projects exist. Boxer Floyd Mayweather and actor Jamie Foxx are among the celebrities the Times identified as having promoted virtual currencies.
The SEC said in its statement said that failure to disclosure compensation received in exchange for the promotion of an ICO could be a violation of anti-touting provisions of federal securities laws. It also individuals may also be liable for potential violations of anti-fraud provisions, for participating in an unregistered offer of securities and for acting as an unregistered broker (see another blog post I wrote on broker-dealer issues in securities offerings).
With respect to the latter, federal securities laws generally consider anyone who effects transactions in securities to be acting as a broker-dealer. This requires that person go through the extensive process of registering with the SEC and the Financial Industry Regulatory Authority.
Those who act as an unregistered broker can be subject to fines and penalties. In addition, there can be serious consequences for companies that use an unregistered broker to help raise capital, including government enforcement action and rescission rights in favor of the investors.
The SEC isn’t the only federal agency to come down on celebrity endorsements. Earlier this year, the FTC sent dozens of letters reminding athletes and other celebrities that they need to disclose their relationships to brands when promoting or endorsing their products through social media. Under the FTC’s “Endorsement Guides,” a connection between the endorser and an advertiser that might affect the weight that consumers should give the endorsement needs to be clearly disclosed. Connections can include things such as a family relationship, compensation or free product gifts.