The principle of full disclosure in the marketing of virtual currencies is a recent focus of regulatory bodies as they slowly confirm that these cryptocurrencies are securities or investment products.
In a Press Release dated Nov. 29, 2018, the Securities and Exchange Commission reported that it had settled charges with Floyd Mayweather, Jr., and Khaled Khaled (known as DJ Khaled) for failures to disclose payments they received for promoting investments in Initial Coin Offerings (ICOs).
These settled charges represent the SEC's first touting (attracting customers by illegal means) violations directly related to ICOs.
ICOs and Virtual Currencies May Be Securities
Mayweather and Khaled's problematic statements via social media came after the SEC issued its DAO (Decentralized Autonomous Organization) Report in 2017, which clarified and warned that tokens or other virtual products sold in ICOs could be considered securities, requiring all those who offer and sell those products in the U.S. to comply with all federal securities laws.
Such clarification by the SEC brings into play laws which govern the marketing of securities in general, including:
- Section 5 of the Securities Act of 1933, which mandates that the offer or sale of securities to the public must be accompanied by the full and fair disclosure necessary to enable prospective investors to make fully-informed investment decisions; and
- The Advertising Rule, which prohibits the direct or indirect publishing, circulating, or distributing of any advertisement that contains any false or misleading statements.
The accused celebrities agreed to pay disgorgement, penalties, and interest, though neither admitted wrongdoing in either case.
SEC Officials: Be Wary of Celebrity Endorsements of Virtual Currencies and Other Securities
Comments by SEC Enforcement Division Co-Directors Stephanie Avakian and Steven Peikin provide important points of caution regarding investment marketing tactics:
- Paid endorsements cannot be presented as unbiased recommendations; full disclosure to investors is an absolute requirement.
- Investors must maintain a healthy awareness that social media influencers, including celebrities, are most often paid promoters, not qualified investment professionals.
- As paid promoters, what these celebrities say on behalf of firms selling securities must comply with performance marketing standards.
Murky Waters Are Clearing: Virtual Currencies and Social Media
When we boil this down, the takeaway becomes simple: the cloudy landscapes of social media and virtual currencies are subject to securities regulation and enforcement, and the related rules and case law are quickly taking shape to educate market participants and drive compliance.
In the ICO contexts, you should expect practices such as touting, improper use of testimonials, and the making of misleading or fraudulent statements to be subject to securities law standards and enforcement, regardless of the "virtual," digital, or online nature of the product being offered.
Firms should have tailored and effective policies and procedures in place to govern the creation, review, and distribution of marketing information, including its use of celebrity testimony and social media.
If you are concerned that your marketing materials or related processes and procedures fail to meet regulations or if you just want to revisit your current practices as regulations surrounding cryptocurrencies tighten, now is the time to act.
Robert D. Conca is a Partner at Jacko Law Group, PC. His practice includes representation of investment advisers, broker-dealers, private funds, and non-financial industry companies, and their personnel, in a variety of ...
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