DANE CHAPMAN—In October 2022, the Securities and Exchange Commission (“SEC”) entered into a $1.26 million settlement with social media influencer and reality TV star Kim Kardashian (“Ms. Kardashian”) for improperly advertising EthereumMax’s (“EMAX”) cryptocurrency token on her Instagram account. In June 2021, Ms. Kardashian posted a picture on her Instagram account promoting EMAX tokens with a link and instructions to purchase them. However, Ms. Kardashian failed to disclose to her hundreds of millions of followers that EMAX paid her $250,000 to publish the post on her Instagram account. In doing this, Ms. Kardashian failed to heed the SEC’s 2017 warning to celebrities and other similarly situated people that the SEC considers cryptocurrency tokens or coins to be a security. Thus, anyone promoting them must disclose any compensation received for the promotion, and failing to do so violates the anti-touting provision of the federal securities laws.
While just a drop in the bucket for Ms. Kardashian’s net worth of $1.8 billion, this is an affirmation for other celebrities to be wary when promoting any sort of cryptocurrency token or coin. Other public figures, such as Floyd Mayweather Jr. and DJ Khaled were both charged in 2018 for failing to disclose similar crypto investment promotions. However, Ms. Kardashian is the most famous celebrity the SEC has penalized to date, signifying to others the SEC’s stance that any form of cryptocurrency promotion must be disclosed to the followers of any platform that it is posted on.
According to the SEC, Ms. Kardashian violated Section 17(b) of the Securities Act of 1933, which specifically prohibits any person from promoting a security without disclosing any payment received or receipt in connection with the security. Section 17(b) was originally created to stop investors from being fooled by stock tip sheets paid for by the issuer of the advertised securities. Section 17(b) now includes everything from regular stocks to cryptocurrency tokens.
The SEC’s firm stance on cryptocurrency token promotions has become crystal clear in recent years. In 2017, the SEC issued an Official Report of Investigation concerning another cryptocurrency token. This report concluded that cryptocurrency tokens were considered investment contracts and thus qualify as securities under the United States Securities Act of 1933 and the Securities Exchange Act of 1934. To reach this conclusion, the SEC applied the well-established test laid out in SEC v. W.J. Howey Co. to determine if something is an investment contract. Under the Howey test, a few factors must be satisfied for the security to be considered an investment contract: “(i) an investment of money in a common enterprise; (ii) with a reasonable expectation of profits; (iii) derived from the managerial efforts of others.” Applying these factors to the 2017 case, the SEC recognized that cryptocurrency tokens are securities that fall well within the realm of the Securities Act of 1933.
Prior to this, the SEC had taken notice of these cryptocurrency promotions in 2017 when it released an official statement clarifying its stance on cryptocurrency tokens. A prospective cryptocurrency investor can purchase a cryptocurrency token that represents a stake in the company’s product or service, similarly to how an investor can purchase a company’s stock. However, cryptocurrency tokens are generally considered very high risk and are significantly less regulated than stocks.
Ms. Kardashian’s EMAX endorsement is a perfect example of the high risk nature of cryptocurrency tokens, as the price of EMAX has plummeted 95% since her Instagram post in June 2021. EMAX is an altcoin, which is any cryptocurrency or token that is not Bitcoin or Ethereum. Altcoins are riskier than traditional cryptocurrencies as they are newer and rely on investors buying them to increase their price, whereas Bitcoin and Ethereum are more established cryptocurrencies with substantial investment and value in them. Accordingly, once investors stopped buying the EMAX token, the value crashed. In addition to Ms. Kardashian’s $1.26 million dollar settlement, there was also a separate class action complaint filed against her and boxing icon Floyd Mayweather Jr., which is still pending, in connection with the fraudulent promotion of EMAX. Ms. Kardashian’s settlement with the SEC might foreshadow the outcome of this pending class action. Nonetheless, the SEC’s message is clear: celebrities and other public figures must disclose to the public any compensation received in connection with their promotion of cryptocurrency tokens.