As the price of Bitcoin reaches record heights and a torrent of money floods into Initial Coin Offerings (“ICOs”), the U.S. Securities & Exchange Commission (“SEC”) issued a statement on Wednesday, November 1, 2017 warning investors to be wary of “celebrities and others” promoting investments in ICOs. See https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos, and accompanying Investor Alert at https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-celebrity-endorsements.
This has been a record year for cryptocurrency as the total amount raised in ICOs in 2017 has surpassed $3 billion and continues to grow. Recently, some celebrities have hopped on the bandwagon, promoting ICOs on social media networks and encouraging the public to invest in specific ICOs.
The SEC statement cautions “investors to be wary of investment opportunities that sound too good to be true” and encourages “investors to research potential investments rather than rely on paid endorsements from artists, sports figures, or other icons.” Shifting focus, the SEC also warned celebrities that their promotional activities could be a “violation of the anti-touting provisions of the federal securities laws” if a celebrity or other individual who promotes a virtual token or coin that is a security does not him- or herself “disclose the nature, scope, and amount of compensation received in exchange for the promotion.”
Although the SEC did not name any names of specific celebrity endorsements of ICOs, several recent high-profile cryptocurrency endorsements may have motivated the SEC to address the point. In July of this year, Floyd Mayweather posted on Instagram a picture of himself on a private jet with stacks of cash placed in front of him making statements about making large amounts of money on August 2 from the Stox.com ICO. DJ Khaled, a music producer and social media star, posted on Instagram in September of this year, stating “This is a Game changer here. Get your CTR tokens now! #CryptoBilli #Bitcoin #Ethereum#Digitalcurrency.” Paris Hilton took it a step further in September of this year, posting on Twitter about a company called “Lyndian,” stating: “Looking forward to participating in the new @LydianCoinLtd Token!” and adding “#ThisIsNotAnAd.” Hilton specifically noted that her post was not an advertisement, implying that her post is not a paid promotion, and leading her followers to believe that she is not getting paid to promote Lyndian but rather was providing an unbiased endorsement. All of these activities appear to be at the heart of the SEC’s concern, as Wednesday’s public statement warned investors that they “should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion,” and advising investors to “consider whether the recommendation is truly independent or a paid promotion.”
Given that one of the SEC’s mandates is to protect investors, promotional activities that have the potential to mislead investors regarding the merits of an investment not surprisingly catch the attention of SEC regulators. Promoters of investments may be inclined to highlight the desirability of an investment by making statements that an investment is approved or endorsed by an authoritative source. However, even if such statements are true, they may mislead investors to believe that the endorsement or approval means that the investment bears less risk than it actually does. Similar to the fact that government licensure of doctors, lawyers, and even drivers does not necessarily mean that the licensed doctor, lawyer, or driver is good at the activity for which they are licensed, instead meaning solely that the individual has the minimal competency to receive a license to engage in the licensed activity, the SEC is concerned that paid endorsements by celebrities may mislead investors to believe that the investment opportunity is approved by the public figure and is therefore a superior investment.
Disclosure is at the heart of the SEC’s rulemaking, as even companies approved by the SEC to be listed on public exchanges such as the NASDAQ or the New York Stock Exchange are only required to make certain disclosures required by the SEC and securities laws to be approved for listing; such approval is not an assessment on the merits of the investment. There is therefore no guarantee that approval to be listed means that what is being presented is a good investment opportunity. Similarly, Wednesday’s statement requires celebrities and others making public endorsements of ICO securities to “disclose the nature, scope, and amount of compensation received in exchange for the promotion” so that investors are apprised of the underlying motivations of the endorsement. The accompanying Investor Alert warns investors “it is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.” Sound guidance indeed.