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"Another One": Celebrity ICO Endorsement Failures

By Joshua Lahijani

In the past decade, with the rise of social media, celebrity social media endorsements and promotions have become a significant source of supplemental or primary income. Celebrities that engage in this business on social media are commonly referred to as influencers. Compensation per post may range from hundreds of dollars and, for some celebrities, up to $1 million.

The Federal Trade Commission (FTC) issues a set of guidelines for "the Use of Endorsements and Testimonials in Advertising" that significantly clarifies the rules for influencers (https://www.ftc.gov/tips-advice/business-center/guidance/ftcs-endorsement-guides-what-people-are-asking). For the purpose of the FTC guidelines, an endorsement is any advertising message that consumers are likely to believe reflect the opinion of the influencer. In doing so, the influencer must adhere to three basic principles: (1) The advertisement must be truthful and not misleading; (2) advertisers must have evidence to substantiate their claims; (3) and the advertisements cannot be unfair. In addition, if an influencer believes that "a gift or incentive would affect the weight or credibility [followers would] give to [a] recommendation," then they must clearly and conspicuously disclose the compensatory relationship. Here is where two celebrities, DJ Khaled and Floyd Mayweather Jr. have violated their duties, but not directly under FTC guidelines, rather, under § 17(b) of the Securities Act (anti-touting).

On November 1, 2017, the Securities and Exchange Commission (SEC) issued a public statement (https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos) and investor alert (https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-alert-celebrity-endorsements) "[u]rging [c]aution [a]round [c]elebrity [b]acked ICOs (Initial Coin Offerings)."

In the statement, the SEC stated: "Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion. A failure to disclose this information is a violation of the anti-touting [and potentially anti-fraud] provisions of the federal securities laws."

While not directly mirroring the FTC guidelines, they share the fundamental philosophy of disclosure. The federal securities laws go a bit further than the FTC, as they require disclosure of the amount of compensation.

Floyd Mayweather Jr. (AKA: Floyd "Money" Mayweather)
(https://www.sec.gov/litigation/admin/2018/33-10578.pdf)

To call Floyd Mayweather Jr. "a well-known professional boxer" is an understatement, as he is one of, if not the, greatest boxers of all time. To have an endorsement by Mayweather has significant reach and influence. At the time of the violations, he had about 21 million Instagram followers, 7.8 million Twitter followers, and 13.4 million Facebook followers.

In 2018, a Miami-based company, Centra Tech, Inc. approached Mayweather with an endorsement deal. In exchange for $300,000, Mayweather would promote on social media the ICO based on the Ethereum Blockchain. An agreement was made and between September 2017 through January 2018, Mayweather made multiple posts and videos on social media promoting the ICO. These promotions occurred after the SEC warned that tokens sold in ICOs may be securities and are subject to federal securities laws. In addition, Mayweather promoted two other ICOs in August and July of 2017. However, Mayweather failed to disclose the nature, scope, and amount of compensation received in exchange for the promotion.

The SEC and Mayweather settled his violations of §17(b) of the Securities Act (without admitting or denying the findings) and agreed to the following sanctions:

1. Cease and desist of violating §17(b) of the Securities Act
2. Disgorgement: $300,000
3. Prejudgment Interest: $14,775.67
4. Civil Money Penalty: $300,000

In addition, Mayweather undertook to forgo any endorsement or promotional agreement with a securities participant for three years.

Khaled Khaled (AKA: "DJ Khaled") (https://www.sec.gov/litigation/admin/2018/33-10579.pdf)

Who doesn't know the signature "DJ KHALED! ANOTHER ONE!" on great hits such as "We Takin' Over", "Wild Thoughts", "I'm So Hood", and "All I Do is Win". Unfortunately, for Khaled, he lost against the SEC. Similar and related circumstances to Mayweather above, Khaled was approached by Centra Tech, accepted $50,000 and promoted its ICO in September 2017. At the time, Khaled held 12.4 million Instagram followers and 3.9 million Twitter followers. Khaled failed to disclose the nature, scope, and amount of compensation received in exchange for the promotion.

The SEC and Mayweather settled his violations of §17(b) of the Securities Act (without admitting or denying the findings) and agreed to the following sanctions:

5. Cease and desist of violating §17(b) of the Securities Act
6. Disgorgement: $50,000
7. Prejudgment Interest: $2,725.72
8. Civil Money Penalty: $100,000

In addition, Khaled undertook to forgo any endorsement or promotional agreement with a securities participant for two years.

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This page contains a single entry from the blog posted on February 19, 2019 10:26 AM.

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