On November 29, the Securities and Exchange Commission (SEC) announced in a press release that it has settled charges against two celebrities for promoting investments in ICOs without disclosing payments received for the promotion. The SEC has previously indicated in a November 2017 statement to the public that investors should be wary of celebrity-backed ICOs, but these are the SEC's first cases against celebrities for promoting ICOs for compensation without appropriate disclosures.
Music producer Khaled Khaled (known as DJ Khaled) and professional boxer Floyd Mayweather Jr. each received consideration from Centra Tech, Inc. for promoting investment in Centra's ICO in late 2017. Khaled received $50,000 for a social media post claiming that the Centra Card was "a game changer". Mayweather received a total of $300,000 for promoting three ICOs on his social media accounts, including posts for Centra's ICO. One post included a photo of his boxing title belts with the caption: "Centra's (CTR) ICO starts in a few hours. Get yours before they sell out, I got mine…"
The SEC found that each of the celebrities violated Section 17(b) of the Securities Act, which makes it unlawful for any person to promote a security for compensation without fully disclosing the receipt of such compensation. The SEC noted that these promotions occurred after the SEC warned in its July 25, 2017, DAO Report of Investigation that virtual tokens or coins sold in ICOs may be securities and that those who offer and sell securities in the United States must comply with the federal securities laws. Mayweather and Khaled have agreed to pay disgorgement, penalties, and interest, and both agreed to a ban on promotion for a certain period of time. Mayweather has also agreed to continue to cooperate in the ongoing investigation.
These cases are not only instructive for the importance of full disclosure to investors, but also indicate the SEC's willingness to find that the tokens issued in these ICOs were securities. Both of the SEC's Cease-and-Desist Orders, found at https://www.sec.gov/litigation/admin/2018/33-10579.pdf and https://www.sec.gov/litigation/admin/2018/33-10578.pdf specifically found that Centra's tokens were investment contracts and therefore securities. In the SEC's press release yesterday, Enforcement Division Co-Director Steven Peikin stated that "Social media influencers are often paid promoters, not investment professionals, and the securities they're touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds."
Lauren Foshee Martin (lmartin@burr.com) is a member of the firm's Blockchain, Cryptocurrency and Electronic Transactions Group and advises clients on transactions and regulatory issues related to digital currency, blockchain, distributed ledger technology, and other emerging technologies. See attorney profile.