The US Securities and Exchange Commission (SEC) announced last week that it had reached a settlement with Floyd Mayweather Jr. (professional boxer) and DJ Khaled (music producer) for failing to disclose payments they received in promoting investments in Initial Coin Offerings (ICOs) on their social media channels.
This move by the SEC reinforces the growing appetite of regulators to deal with tokens, coins and other forms of cryptocurrencies in the same way that they deal with securities (see our article on the view of tax treatment of cryptocurrencies here).
The SEC had previously warned that tokens may be securities and those offering securities in the US must comply with securities laws.
In the SEC case, Mayweather Jr. was allegedly paid US $100k, and DJ Khaled US $50k, by Centra Tech Inc. for promoting Centra Tech’s ICO on social media. Neither disclosed they were paid to promote the ICO. Examples of their wrongdoing included DJ Khaled calling the ICO a, “game changer”; and Mayweather tweeting, “[g]et yours before they sell out, I got mine…”
The accused each agreed to pay disgorgement (repayment of ‘ill-gotten gains’), penalties and interest, and agreed not to promote securities (whether digital or traditional) for 3 years in the case of Mayweather Jr., and 2 years in the case of DJ Khaled.
The SEC media release closes with two quotes from directors of the SEC Enforcement Division. These quotes address two separate concerns: (1) the failure to disclose commissions by ‘influencers’ misleading investors; and (2) the potential fraud relating to investments promoted by influencers (whether traditional or digital).
And Kiwi crypto 'influencers' should also take note: in the New Zealand context, the Financial Markets Authority has issued guidance on "fair dealing" requirements (broad principles that prohibit misleading or deceptive conduct, false or misleading representations and unsubstantiated representations) relating to ICOs.
If the ICO involves a financial product or financial service, promotional material must comply with the fair dealing requirements in the Financial Markets Conduct Act 2013 (FMCA). Even if the ICO is not providing a financial product or financial service under the FMCA, the fair dealing requirements of the Fair Trading Act 1986 still apply to promotion of the ICO.
"These cases highlight the importance of full disclosure to investors...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....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..."