- Some influencers and celebrities promote a crypto because they are being compensated.
- But Lisa Braganca and Danielle Dudai say there could be serious unintended consequences for it.
- Some digital assets could be considered a security and therefore be subject to SEC regulations.
As we enter the last quarter of 2021, some crypto investors are pacing themselves for what they believe will be a parabolic bull run.
With bitcoin back at a record high, the search for information is also on, as new investors seek guidance on where to place their bets.
But good advice is hard to come by in a sector that’s new and mostly unregulated.
Unfortunately, beginners can fall prey to content creators who have mastered the art of hype and FOMO investing. There’s no end to the number of influencers across social-media platforms promoting cryptocurrencies they say will perform well. And while some content creators have a genuine desire to educate, others might have a self-invested interest — and could even land under the scrutiny of regulators.
Hyping a crypto is popularly known as “shilling.” And what investors need to know is that sometimes, content creators are compensated for selling you on the idea of buying a crypto.
As for what influencers need to know, if you’ve been compensated in any way, the lines between what’s considered legal and not can become very blurry, according to legal experts.
That might come as a surprise because even well-known celebrities have advocated for a variety of tokens. Charli D’Amelio, Jake Paul, and Jimmy Donaldson all promoted safemoon, while Kim Kardashian, Floyd Mayweather, and Paul Pierce have publicly supported the ethereum max token.
In June, Kardashian posted an Instagram story to her 228 million followers at the time saying she had a “big announcement” about ethereum max. She then displayed a static page notifying viewers that 400 trillion tokens had been burned from the admin wallet so that the “community” held the majority of the tokens. The post was short and bizarre.
Vitalik Buterin, the founder of ethereum, recently expressed his disdain for Kardashian’s Instagram post, referring to the crypto as a “borderline scam” and a pure “money grab” in a recent interview with Bloomberg.
Attorneys familiar with the regulatory framework see this all the time. Lisa Braganca, a former Securities and Exchange Commission branch chief turned SEC investigations and litigation lawyer at Braganca Law, said Kardashian probably didn’t get good legal advice.
“I was shocked when I looked and just saw ‘#Ad’ and then saw commentary about, ‘Oh, well, this complies with the Federal Trade Commission’s law.’ Well, yes, but you forgot about the Securities and Exchange Act. So that’s a big miss,” Braganca said. The FTC protects consumers against unfair, deceptive, or fraudulent practices, while the SEC regulates securities markets and protects investors.
The laws that govern cryptocurrencies could fall under the jurisdiction of more than one entity. They remain muddy, and that’s why it’s easy for even A-list celebrities to stumble. For example, some coins or tokens could be seen as a utility or decentralized asset rather than a security.
The confusion could have stemmed from a statement made by William Hinman, the director of the division of corporate finance for the SEC, who said that bitcoin and ether, in particular, were not securities due to their decentralized structures.
But that doesn’t mean other cryptocurrencies will fall under the same category. In fact, they probably won’t. Braganca said just because an entity with an interest in promoting a token might benefit from its promotion doesn’t mean it’s decentralized. And once you get into the SEC’s territory, the charges for engaging in this type of promotion can be a laundry list, Braganca said.
“There is no Mr. Bitcoin out there who is paying people to promote bitcoin. There used to be the Ethereum Foundation that was putting out ethereum, but now there isn’t; there’s just a bunch of ethereum out there,” Braganca said. “And I think that’s where people get confused.”
Danielle Dudai, an attorney who covers cryptocurrency regulations as part of her practice, added that the rules that govern securities will most likely apply to crypto assets because they are considered securities until proved otherwise.
This means promoting any kind of crypto could have some serious consequences, especially if the promoter doesn’t properly and publicly disclose details about their compensation every time they post.
The pitfalls and consequences
While the SEC hasn’t made headlines for widespread crackdowns on celebrities and influencers, it doesn’t mean the regulators aren’t keeping a watch, and maybe even a file, Dudai said.
In 2018, the SEC charged Mayweather, a professional boxer, and the music producer DJ Khaled, with failing to disclose payments they received for promoting initial coin offerings.
In 2020, the SEC also charged John McAfee, founder of the eponymous software company, with “fraudulent touting” for also promoting ICOs to his Twitter followers without disclosing that he had been compensated.
Fraudulent touting isn’t the only risk associated with promoting a token. An influencer or celebrity could also face charges if they promote crypto that ends up being a scam, or what’s popularly referred to as a rug pull. This happens when developers or founders sell their shares and take profits after investors buy in. The price then plummets, leaving unsuspecting bystanders with losses.
Braganca said that if a token being promoted ends up being a fraud and the SEC decides to pursue the case, the promoters can get tagged for having made misrepresentations, even if they didn’t know it would end up being a scam.
If a token is eventually not deemed a security, or the person under investigation is able to prove they weren’t aware it was a fraudulent scheme, Braganca said the costs of litigating with the SEC could still run in the hundreds of thousands of dollars.
“The issue for many people is, ‘Can I afford to prove that I’m right?’ And many individuals and small businesses just can’t. And so they’ve ended up having to settle, and sometimes they end up having to settle fraud charges,” Braganca said.
Promoters can also be sued by individual investors or through a class-action lawsuit, Braganca said. And although not every case will be prosecuted, some factors could increase the likelihood a promoter ends up on the SEC’s radar.
These factors could include how much large-scale attention a promoter gets and how sketchy the token being touted is. Additionally, just because cases aren’t being prosecuted doesn’t mean the SEC isn’t investigating people privately, Braganca added.
Dudai said that influencers and celebrities should always notify their followers if they’ve been compensated to promote a token every time they post about it. Braganca added that if you plan on promoting crypto, you should regularly consult with an attorney who specializes in SEC laws.
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