In news that might send a chill down the spine of most cryptocurrency influencers, the SEC is starting to drop the hammer on social media influencers that promoted Initial Coin Offerings (ICOs) in the past.
The first charges were against one of the best boxing welterweights of all time, Floyd Mayweather, and a heavy weight, DJ Khaled.
The SEC found that Mayweather didn’t disclose promotional payments from three ICOs including a $100,000 payment from Centra Tech Inc. ($300,000 in total), and Khaled failed to disclose a $50,000 payment from Centra Tech.
The two parties agreed to pay without any admission or denial. Floyd Mayweather had to pay disgorgement (repayment of ill-gotten gains that is imposed on wrongdoers by the courts) of $300,000, a penalty of $300,000, and $14,775 in prejudgment interest. Khaled had to pay $50,000 in disgorgement, $100,000 penalty, and $2,725 in prejudgment interest. Mayweather agreed to a three-year ban on any security promotion, and Khaled agreed to a two-year similar ban.
In the largely unregulated mid-late 2017 and early 2018 ICO Wild West, many social media influencers and media platforms took payments in the form of direct payments or affiliate commissions to advertise ICOs.
As the dust begins to settle, the SEC has started to materialize a definition of what constitutes a security and what does not. SEC Chairman, Jay Clayton, said the SEC views most ICOs as securities:
“We don’t believe Bitcoin is a security. Many of the ICOs that you see and you talk about, they are securities. And if you’re going to offer or sell securities, you have to do so in compliance with our laws. We’ve been clear about that, the recent actions further emphasized that our securities laws to apply to the ICO space, and if people are going to raise money using initial coin offerings they either have to do so in private placement or register with the SEC.”
If the math holds up, the disgorgement and penalties seem to account for the initial payment for the promotion + a penalty of 1-2x of that same amount + interest.
These cases highlight the importance of full disclosure to investors,” said Enforcement Division Co-Director Stephanie Avakian. “With no disclosure about the payments, Mayweather and Khaled’s ICO promotions may have appeared to be unbiased, rather than paid endorsements.”
“Investors should be skeptical of investment advice posted to social media platforms, and should not make decisions based on celebrity endorsements,” said Enforcement Division Co-Director Steven Peikin. “Social media influencers are often paid promoters, not investment professionals, and the securities they’re touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds.”
What This Means for You
If you made the decision to invest in an ICO after you heard Floyd Mayweather say “Get yours before they sell out, I got mine…” or DJ Khaled call it “Game changing” and lost your money – sorry. Always consult with a licensed financial professional before making any investments.
This logic would also justify casting aspersions on any other heavily promoted on social media products like energy drinks, slimming tea, or tooth whitening lasers.
If you’re an influencer, it will help you to develop and hone in on some cognizance of what you can promote, disclosures you will have to make, and promotions that you should simply turn away from.