This is an update on a December 2018 alert warning celebrities of the dangers of accepting compensation to endorse investments in securities, particularly Initial Coin Offerings (ICOs).
The alert discussed charges filed by the Securities and Exchange Commission (SEC) against boxing legend Floyd Mayweather and world-renowned music producer Khaled Khaled (aka DJ Khaled). In November 2018, Mayweather and Khaled consented to SEC findings that they failed to comply with a law requiring them to disclose compensation received for promoting on social media investments being offered in ICOs.
In a related development, last week the SEC charged action movie star and producer, Steven Seagal, with failing to disclose compensation he received for promoting on social media an ICO sponsored by an international online company, Bitcoiin2Gen. Seagal, who currently resides in Russia, consented to a settlement that required him to forfeit the compensation he received from Bitcoiin2Gen, pay an additional monetary penalty, and abstain from promoting any securities (digital or otherwise) for three years. Mayweather and Khaled agreed to similar settlement terms with the SEC.
Athletes, actors, and other influencers routinely reap the benefit of their popularity by earning compensation to endorse products and services. In most instances, these endorsements present little risk of harm to celebrities. The SEC enforcement actions against Mayweather, Khaled and Seagal serve as an important reminder, however, that liability can arise from endorsements not handled correctly. To that end, celebrities and their advisers should consider the following when planning endorsement deals:
- Approach endorsements of any investment or loan product with extreme care as the SEC has broad jurisdiction over investments and securities. What constitutes a “security” for purposes of the federal securities laws is complex and includes many forms of transactions that would not be obvious to non-securities experts.
- ICOs and digital asset endorsement deals should be properly disclosed to the public and consideration should be given to vetting the sponsoring company because the digital asset market is ripe with bad actors. The SEC likely will come down hard on celebrities who improperly endorse ICOs given the SEC’s public warnings in this area and the notoriety of the Mayweather, Khaled and Seagal settlements.
- Many other government agencies and regulators can scrutinize celebrity endorsements. For example, in April 2017, the Federal Trade Commission (FTC) sent letters to over 90 celebrities, athletes and influencers reminding them to clearly and conspicuously disclose their relationships to brands when promoting or endorsing products through social media. Several months later, the FTC sent letters to at least 21 people with large Instagram followings demanding to know their relationships with companies whose products they were promoting. Similarly, the U.S Food and Drug Administration declared a Kim Kardashian post on Instagram and Facebook in violation of the law for providing misleading information about a certain drug.
If you have questions about the potential risks associated with endorsing an investment and how to mitigate those risks, please contact Michael Rivera.