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Sorry, Paris: SEC Warns Celebrity Endorsements Of ICOs Could Be Illegal

The SEC’s crackdown on ICOs has finally brought it to Hollywood.

The agency - which in a ruling issued over the summer legally qualified ICOs as securities - said today that celebrities who endorse token sales might be violating so-called “anti-touting” laws if they don’t state what compensation they received, if any.

As we’ve pointed out numerous times, celebrity endorsements of ICOs have become something of a punchline in recent months as Floyd Mayweather, Paris Hilton, Jamie Foxx, Dennis Rodman and many, many others have embraced the trend.

In some cases, the celebrities apparently experienced a twinge of regret and deleted their endorsements from their social media platforms, like Hilton did with Lydian Coin - a company that has few to recommend it aside from an indecipherable White Paper and a CEO who pled guilty to beating his girlfriend.

More broadly, regulators from Canada to China to Singapore are cracking down on ICOs to try and protect gullible investors. Most have taken a similar approach to the SEC by declaring the tokens to be securities subject to securities laws and regulations that generally prohibit outright fraud.

Of course, that the SEC would issue this “quick clarification” is hardly a surprise. Fortune raised the legality issue surrounding celebrity ICO endorsements in an article published in September, two months after the SEC delivered its “warning shot” across the bow of the ICO market.

“Aside from pure in-game token situations, companies really need to think of these as securities,” says Jeffrey Neuburger, who advises clients about ICOs at the law firm Proskauer in New York.

 

Neuburger adds that those promoting the securities, including Mayweather, could face serious consequences, especially if the company in question has not been truthful in the course of the token offering.

 

“If they know something is not right and they endorse it, there could be all sorts of fallout, including SEC action and even criminal charges if there is evidence of fraud,” he says.

 

There is no evidence that the companies endorsed by Mayweather, whose publicity firm did not respond to a request for comment, have done anything wrong. Nonetheless, he may be deemed among those responsible if the SEC decides the firms engaged in the illegal sale of securities.

Despite the international crackdown, the ICO market is still chugging along. The token sales have already raised more than $3 billion this year despite troubles at one of the largest and most high-profile ICOs. Given that these types of questionable endorsements were fairly widespread prior to the SEC’s latest warning, we imagine this is yet another “warning shot” - putting celebrities on notice that, should they choose to endorse one of these products, their promotional posts must be clearly identified, and the endorser must make any pertinent disclosures regarding compensation.

We imagine they will do the right thing.

* * *

Read the SEC's warning below:

SEC Division of Enforcement and SEC Office of Compliance Inspections and Examinations

Nov. 1, 2017

Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments.  These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.  The SEC’s Enforcement Division and Office of Compliance Inspections and Examinations encourage investors to be wary of investment opportunities that sound too good to be true.  We encourage investors to research potential investments rather than rely on paid endorsements from artists, sports figures, or other icons.  

Celebrities and others have recently promoted investments in Initial Coin Offerings (ICOs).  In the SEC’s Report of Investigation concerning The DAO, the Commission warned that virtual tokens or coins sold in ICOs may be securities, and those who offer and sell securities in the United States must comply with the federal securities laws.  Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.  A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.  Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.  The SEC will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws.

Investors should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion.  Investment decisions should not be based solely on an endorsement by a promoter or other individual.  Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.  Conduct research before making investments, including in ICOs.  If you are relying on a particular endorsement or recommendation, learn more regarding the relationship between the promoter and the company and consider whether the recommendation is truly independent or a paid promotion.  For more information, see an Investor Alert that the SEC’s Office of Investor Education and Advocacy issued today regarding celebrity endorsements.