Cryptocurrency Promoter Defense Lawyers
Our Former Federal Prosecutors Represent High-Profile Clients in Cryptocurrency Promotion Cases
The U.S. Securities and Exchange Commission (SEC) and other state and federal authorities are cracking down on the promotion of cryptocurrency investment opportunities. In doing so, they are placing particular focus on targeting high-profile individuals—including athletes and celebrities—who back cryptocurrencies on social media.
This effort has played out in several recent highly publicized cases. In October 2022, Kim Kardashian entered into a $1.26 million settlement with the SEC after failing to publicly disclose payments she received for promoting EthereumMax (EMAX). Even though she labeled the offending Instagram story as an “ad”—as required by the Federal Trade Commission (FTC) when promoting items for profit on social media—the SEC determined that this was not enough. In the wake of the FTX collapse in November 2022, several celebrities, including Tom Brady and Mark Cuban, are facing fraud allegations arising out of their efforts to promote the FTX platform.
With federal regulators and plaintiffs’ lawyers alike seizing on the current momentum in this area, it is unlikely that efforts to target celebrities, athletes, and other high-profile individuals for promoting cryptocurrencies and related platforms are going to end any time soon. With this in mind, individuals who have engaged in online cryptocurrency-related promotions in the past need to assess their risk and prepare to defend themselves if necessary. For those who are considering entering into the lucrative world of online cryptocurrency promotion, a cautious and transparent approach is essential for avoiding unwanted scrutiny.
SEC Enforcement of Cryptocurrency Promotor Rules
The SEC has made cryptocurrency—and cryptocurrency promotion in particular—a key focus area in recent years. As the SEC struggles with limited oversight of a rapidly expanding global market, it is using the regulatory tools and enforcement mechanisms they have available to target what they view as misleading practices.
Along with misrepresenting the risks associated with investing in cryptocurrencies and other digital assets, this includes misrepresenting—or failing to fully represent—compensation received in exchange for promoting these assets.
Notably, the SEC is not the only agency with oversight in this area. The FTC plays a significant role in this area as well, and it has published a guidance document titled Disclosures 101 for Social Media Influencers focused specifically on promotions and endorsements. But, while the FTC has established what can be viewed as the baseline requirements for social media promotion and endorsement compliance, addressing these requirements is not necessarily enough to avoid scrutiny from other authorities—including the SEC.
For example, while the FTC suggests that “simple and clear language” will often be enough to indicate that an influencer has been paid for a social media post (including using terms like “ad” and “sponsored”), this is not necessarily enough for the SEC. In Kim Kardashian’s case, she labeled her offending post as an “ad.” Yet, in announcing the SEC’s settlement with Kardashian, SEC Chair Gary Gensler stated:
“Ms. Kardashian’s case . . . serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities.”
Disclosing when and how much someone is paid to promote a cryptocurrency investment opportunity goes far beyond using “simple and clear language” as the FTC advises. To maintain SEC compliance, celebrities and other high-profile individuals must do much more. In the same announcement, the Director of the SEC’s Enforcement Division, Gurbir S. Grewal, went even further, stating:
“The federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion.”
Also notable is the fact that Kardashian’s settlement with the SEC included a $1 million penalty in addition to disgorgement of the approximately $260,000 she received for promoting EthereumMax (EMAX). This shows that the SEC is not going easy on celebrities who violate the law.
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Dr. Nick Oberheiden
Founder
Attorney-at-Law
Lynette S. Byrd
Former DOJ Trial Attorney
Partner
Brian J. Kuester
Former U.S. Attorney
Hon. Kevin McCarthy
55th Speaker, U.S. House of Representatives (ret.)
Government Consultant
Mike Pompeo
Of Counsel
Former U.S. Secretary of State
John W. Sellers
Former Senior DOJ Trial Attorney
Linda Julin McNamara
Federal Appeals Attorney
Nicholas B. Johnson
Former Prosecutor
Roger Bach
Former Special Agent (DOJ)
Chris J. Quick
Former Special Agent (FBI & IRS-CI)
Michael S. Koslow
Former Supervisory Special Agent (DOD-OIG)
Ray Yuen
Former Supervisory Special Agent (FBI)
Celebrity Defense in SEC Cryptocurrency Promotion Investigations and Enforcement Actions
For athletes, celebrities, and other high-profile individuals targeted in cryptocurrency promotion cases, presenting an effective defense presents various challenges. Social media promotion is public by nature; and, while it may be possible to delete a post after the fact, at this point the damage may have already been done. As a result, when the SEC discovers a social media post promoting a cryptocurrency investment that lacks the requisite disclosures, it may appear as though the Commission has an open-and-shut case.
But, while these cases present challenges, there are defense strategies available—and utilizing these strategies is imperative for avoiding unnecessary consequences.
For example, a key defense strategy in many SEC investigations is to argue a lack of intent. While lack of intent is not necessarily a complete defense to liability (as illustrated by Kim Kardashian’s case, in which it appears that she intended to comply with the law by labeling her Instagram story as an ad), it can substantially mitigate the risks involved with facing SEC scrutiny.
In these types of cases, it will often (though not always) be advantageous to work with—rather than against—the SEC as well. Executing an effective defense strategy does not have to be, and in many cases will not be a combative process. While celebrities and other targets need to be careful not to share too much information voluntarily, taking a reasonably cooperative approach will often prove to strategically facilitate a favorable resolution.
With that said, forcefully asserting a complete defense will be warranted in some cases. The SEC’s enforcement authority extends only to cover cryptocurrency-related securities and cryptocurrencies that themselves qualify as securities. In an October 22 interview, SEC Chair Gary Gensler stated, “I believe based on the facts and circumstances most of these tokens are securities.” This means that the SEC’s position is that some cryptocurrencies do not qualify as securities; and, in these cases, the SEC’s disclosure rules do not necessarily apply.
For celebrities, athletes, and other high-profile individuals who are interested in receiving compensation to promote cryptocurrencies or cryptocurrency-related investments on social media, a proactive focus on compliance is essential for avoiding costly mistakes. Along with defending clients against the FTC and SEC, we also advise clients regarding cryptocurrency promotion compliance.
If you are considering a social media cryptocurrency promotion or endorsement, or if you have a high-profile client who is considering a foray into cryptocurrency promotion, our lawyers can guide the way forward. Our lawyers can thoroughly explain the risks involved and help you craft promotional posts or stories that comply with the law.
The legal requirements for promoting cryptocurrency are significantly more complex than most people realize—largely due to the fact that most promoters do not follow the law. But, this is not an excuse for non-compliance, and the SEC is placing particular emphasis on targeting athletes, celebrities, and other high-profile individuals. When promoting cryptocurrency investments for profit, posts must include information about the compensation received, including (but not limited to) the source, timing, and amount of payment.
The promotion rules for cryptocurrency are different from the rules for other social media endorsements in most cases. This is because most cryptocurrencies and cryptocurrency-related investments qualify as “securities” under federal law. As a result, not only must promoters meet the FTC’s consumer protection requirements, but they must meet the SEC’s disclosure requirements as well.
What Are the Penalties for Unlawfully Promoting Cryptocurrency Investments Online?
To be clear, there is nothing inherently illegal about promoting cryptocurrency investments online. Rather, where celebrities and other influencers get into trouble is with regard to the FTC’s and SEC’s disclosure requirements. When targeted by the SEC under federal securities disclosure laws, individuals can face disgorgement and fines; and, in severe cases, they can face federal prison time as well.
Yes, if you are thinking about endorsing a cryptocurrency investment opportunity for profit on social media, you should talk to a lawyer first. You will need to craft your posts and stories very carefully to avoid triggering SEC scrutiny.
If the SEC is investigating your promotion of cryptocurrency investments on social media, you should consult with an experienced defense lawyer promptly. While these investigations can lead to substantial penalties, targeted individuals may have a variety of defenses available.
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