Influencers Beware: Feds Crack Down on Celebrities Shilling Digital Currency
In a threat to the new influencer economy, regulators send a message to stars like DJ Khaled and Floyd Mayweather who are getting paid to promote coin offerings.
In August 2017, Floyd "Money" Mayweather Jr. referred to himself as "Floyd Crypto Mayweather" and said in an Instagram post that he was going to make a "$hit t$n of money" from an Initial Coin Offering. The Securities and Exchange Commission noticed, and the boxer narrowly avoided a financial knockout by settling with the agency for promoting such ICOs without disclosing he was paid to endorse them. Music producer DJ Khaled cut a similar deal after touting a cryptocurrency debit card that he described as a "game changer" after being paid $50,000.
Unlike the Federal Trade Commission's 2017 crackdown on Hollywood influencers who weren't disclosing traditional endorsements on social media — which inspired many stars to begrudgingly comply with regulations as they kept posting — experts say the SEC scrutiny on celebrities touting digital currency is serious enough to consider avoiding potentially lucrative deals entirely.
"Until recently, the draw was pretty significant," says Kristen Howell, who specializes in advising companies on securities matters. "It was incredibly easy to launch an ICO. Amazing amounts of money would pour in. You could raise $10 million in two minutes."
The biggest challenge was marketing. Typically, influencers would provide an easy answer, offering near-immediate access to millions of potential investors in exchange for a big payday (Mayweather has 7.8 million Twitter followers; Khaled has 4.2 million). But with digital currency, there's a catch. The new financial frontier lacks clear guidance on what kinds of coins require compliance with federal securities law.
While some stars keep flouting the FTC rules, unafraid of a government slap on the wrist, SEC enforcement comes with more serious consequences. Mayweather and Khaled on Nov. 29 settled with the SEC. Mayweather will pay more than $600,000 in disgorgement, penalties and interest, while Khaled is on the hook for more than $150,000. Both agreed not to promote any kind of security in the near future.
"This SEC case is a pretty scary message to celebrities," says Jeff Greenbaum, who specializes in advertising and marketing law. "It's even more evidence that the government, at many different levels, is concerned about the influencers' impact on the marketplace."
There are three major segments of digital currency: token securities, which are essentially stocks; cryptocurrency like bitcoin, which can be used to pay for a wide variety of things across multiple platforms; and utility tokens like popular video game Fortnite's V-bucks, which can be used only for a singular purpose in one place and don't have outside value. All three varieties are generally treated as securities until the SEC is convinced otherwise, Howell says, and legally promoting securities requires a registration as a broker-dealer with the Financial Industry Regulatory Authority, which is a major undertaking.
So it's nearly impossible as of now for stars to endorse tokens within the legal guidelines — and disclosing an endorsement to avoid the ire of the FTC could put potentially illegal activity on the SEC's radar. Endorsers also could face investor lawsuits and being labeled a "bad actor" by the SEC, which would limit his or her ability to secure funding for future entrepreneurial efforts.
"If the token is definitely not a security, then it's just a standard endorsement," Howell says. "The problem is they can't right now be 100 percent sure it's not a security." She advises any influencer considering a digital currency endorsement to either ask the SEC for a no action letter, which isn't quick, or get a legal opinion from a reputable law firm, which isn't cheap. But, Howell warns, "the consequences can kill their personal brand."
Andrew Apfelberg, who represents talent and consumer products companies including nail polish giant OPI and the Bob Marley estate, notes, "It's not a red light, but it's a deep orange. Proceed with extreme caution. If you had a sophisticated enough team, you could probably find a way to get there."
This story appears in the Jan. 4 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.