Commentary

SEC Cracking Down On Influencers Endorsing Initial Coin Offerings

The Securities and Exchange Commission yesterday issued a stern warning about — and to — celebrity endorsers “and others” who are using social media to promote initial coin offerings and other investments without disclosing their own pecuniary interest in doing so.

What are initial coin offerings, you ask? 

“Coin offerings are a way for start-ups or online projects to raise money without selling stock or going to venture capitalists — essentially a new form of crowdfunding,” Nathaniel Popper explained in an explanatory FAQ piece for the New York Times last week.

They “have come out of nowhere in 2017 to become the talk of Silicon Valley and Wall Street. Programmers have raised over $3.2 billion this year by selling their own virtual currencies to investors. That is 3,000% more than the amount raised using coin offerings in 2016,” Popper continued. 

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And some of the 270 or so offerings made this year have used heavyweight personalities such as Floyd Mayweather, actor Jamie Foxx, rapper DJ Khaled, socialite Paris Hilton and soccer player Luis Suarez in pitches that have garnered hard cash for the issuers.

An illustrative screengrab of a Mayweather Instragram pitch for one such enterprise sits atop Jeff John Roberts piece for Fortune. It ain’t exactly David Oglivy at his most refined: “I’m gonna make a $hit t$n of money on August 2nd on the Stox.com ICO,” Mayweather posted.

“These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement,” the SEC said yesterday in a statement. “Investors should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion,” it also warned.

And the problem with the Mayweather post was that he didn’t maker it obvious that he was also presumably receiving a “$hit t$n of money” for expressing his enthusiastic optimism about Stox.com, which describes itself as “creating the world's best decentralized prediction market platform.”

“Subsequent posts by Mayweather included text to suggest they were paid endorsements,” Roberts writes. “The disclosures, however, were not especially conspicuous (in some cases amounting to just the hashtag #ad), and it’s unclear if they would be sufficient for the SEC rules.”

“Why the U.S. regulator has waited until now to issue a statement on this issue given the bubble developing in terms of the number of ICOs, token sales and crowdfunds makes one wonder. At least they are upping the ante,” muses Roger Aitken for Forbes.

“And, who knows if this will be the precursor to fines, litigation against market participants in the crypto space and prison sentences down the line for those who transgress. This is against a backdrop of the number of ICOs showing no sign of slowing down in what might be described as a feeding frenzy,” Aitken continues.

Over on CNBC.com, Evelyn Cheng observes that the warning follows hard on the heels of Popper’s “detailed expose” in the Times on Friday. “The SEC this summer signaled securities laws may apply to digital coins, and issued an investor bulletin about the risks of investing in the coin sales,” she also points out.

“The SEC on Wednesday also issued an investor alert intended to educate retail investors who might be swayed by celebrity endorsements,” reports Dave Matthews for the Wall Street Journal.

“Earlier this year, the SEC cracked down on stock touts who wrote articles in online publications without disclosing they were paid to hype a stock. The sweep targeted 27 people and companies involved in what the SEC said was ‘nothing more than paid advertisements,’” Matthews continues.

The SEC is not the only federal agency cracking down on influencers who aren’t up front about why they are so enamored by this or that gimcrack or “opportunity.” 

“With much fanfare, the Federal Trade Commission (FTC) continues to take actions relating to so-called ‘social media influencers’ who allegedly fail to disclose material connections to the products or brands they endorse. Recurring enforcement actions and guidance — and the FTC’s ongoing promotion of its own efforts, such as through Twitter chats — make it clear that the FTC believes that its message has still not been heard by all of the players in this advertising ecosystem, including influencers themselves,” write Julie O'Neill & Adam Fleisher on the always informative Socially Aware blog published by the Morrison & Foerster law firm.

“In short, any endorsements in any medium where the endorser has a material connection of any kind to the endorsed advertiser must be disclosed …,” they continue.

End of story.

1 comment about "SEC Cracking Down On Influencers Endorsing Initial Coin Offerings".
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  1. Paula Lynn from Who Else Unlimited, November 2, 2017 at 8:54 a.m.

    No wonder the Pied PIper always get the children.

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