The SEC recently settled charges against two prominent celebrities in connection with the promotion of initial coin offerings. Boxer Floyd Mayweather Jr. and music producer and social media star DJ Khaled were charged in separate incidents with failing to disclose that they had received payments for promoting ICOs. While the SEC has provided prior guidance and warnings regarding the ICO and cryptocurrency markets, I believe that these are the first situations in which the SEC has actually brought enforcement actions and levied substantial monetary penalties in connection with such promotional activities.
Mayweather and Khaled each made endorsements of ICOs, primarily through their social media platforms. This allowed them to immediately convey their endorsements to their numerous social media followers. Each individual was paid a fee for making these ICO endorsements, but neither individual disclosed that he was being compensated for these promotional activities. The SEC charged each individual with violating Section 17(b) of the Securities Act of 1933, which prohibits anyone from promoting a security without fully disclosing that they are being compensated for such endorsement and the amount of the payment.
The SEC’s prime concern here appeared to be that investors who are unaware of these compensation arrangements might think that Mayweather’s and Khaled’s endorsements were independent and were not influenced by this compensation. In its November 29, 2018 press release regarding this matter, the SEC stressed the “importance of full disclosure to investors” and said that “investors should be skeptical of investment advice posted to social media platforms and should not make decisions based on celebrity endorsements”. For further discussion of the SEC’s positions in the ICO and cryptocurrency areas, you can access SEC Release No. 81207 (July 25, 2017) here.
The SEC is right in its actions in these situations. It’s clear that athletes like Mayweather and music industry leaders like Khaled exert significant influence over their fans, and this is magnified on social media. For example, Khaled is a well-known and powerful social media influencer who is sometimes called the “King of Snapchat”. When such powerful social media influence enters the securities offering and disclosure area, it’s important for the SEC to take the steps necessary to ensure that the correct investor safeguards are in place even though the investor context is not the traditional one.
Neither Mayweather nor Khaled admitted or denied the SEC’s charges in this matter, and I’m not imputing bad motives to either man. Each agreed, however, to pay fairly substantial amounts for disgorgement, penalties and interest. Mayweather paid over $600,000, while Khaled paid over $150,000, and each agreed to not promote any securities (digital or otherwise) for three years (Mayweather) and two years (Khaled).
This situation demonstrates the SEC’s commitment to carefully regulate the ICO and cryptocurrency areas and its willingness to take firm and swift action when it discovers problem situations. ICO issuers and promoters should carefully plan their actions and strategies to ensure that they comply with SEC laws and regulations.