Celebrity Endorsers and Potential SEC Scrutiny

As one of the most famous individuals in the world, it is not uncommon for Kim Kardashian (“Kardashian”) to make headlines. Recently, the headline related to fines and penalties to be paid to the Securities and Exchange Commission (“SEC”) in connection with Kardashian  failing to disclose that she was being compensated  to promote EthereumMax tokens (“EMAX”).

Kardashian agreed to pay an aggregate of $1.26 million in her settlement with the SEC for her failure to disclose in her Instagram posts about EMAX that she was being paid to promote EMAX. The SEC stated that Kardashian violated the anti-touting provisions of the federal securities laws. The settlement includes $1 million in penalties, $260,000 in repayment of amounts Kardashian was compensation (plus accrued interest), and Kardashian also agreed not to promote any crypto asset securities for three years.

Celebrities who are influencers as well as the issuers of securities, which they endorse, may have some concern about compliance with securities laws in connection with these types of promotional activities. It is important for celebrities and influencers to remember that merely stating a post is an “#ad” is not sufficient disclosure in the eyes of the SEC when it comes to the promotion of a security. In Kardashian’s post, she did not state she was being paid $250,000 to promote EMAX.  Although she did post “#ad”, there is a higher level of disclosure and scrutiny when the promotion involves a security or potential security (and not just a consumer product). The SEC is making it clear, that if a person is promoting something that could be considered a security that a person receiving compensation for promotion will need to do more than just end the post with “#ad”. In that context, the SEC could subject the endorser to fines, penalties and sanctions. In addition, investors may have the ability to rescind their investment, resulting in the issuer having to return the full investment to investors as well as separate penalties or sanctions.

Promoting a security adds an additional layer of exposure and risk to the endorser and the issuer of the security. These additional requirements stretch beyond the rules that would typically apply to promotion of a tangible product for which the Federal Trade Commission has released clear guidelines in connection with disclosing that a post is an advertisement.

Cole Schotz does not represent the parties being described here. We are posting this for informational purposes only. If you have received a notice and have any questions, you should contact Debtors’ counsel.