SEC warns that celebrity cryptocurrency endorsements may be illegal

[Hydrogen]

The Securities and Exchange Commission has issued a statement warning celebrities that they may be violating the law if they make paid endorsements of cryptocurrencies without disclosing the payments.

Just a few months ago, there would have been no need for such a warning because there were very few celebrities endorsing blockchain products (though Mike Tyson has been endorsing Bitcoin products since at least 2015). But with billions of dollars flooding into initial coin offerings, celebrities like Floyd Mayweather and Paris Hilton have begun promoting new cryptocurrencies on social media.

Readers of Ars will be shocked to learn that these celebrity-endorsed blockchain technologies have not exactly been the cream of the crop. A September investigation by Forbes reported that the Hilton-endorsed currency, called LydianCoin, was founded by a man "being sued by at least four former employees for harassment and discrimination" and who is facing possible jail time related to domestic violence allegations.

Last week, The New York Times dug into Centra, one of the cryptocurrencies Mayweather has given a paid endorsement. Centra's website listed a president who seems not to exist—his photo was of "a Canadian physiology professor who had no relation to Centra." Centra claimed it would offer a Visa- or Mastercard-based debit card for spending the cryptocurrency, but Visa and Mastercard say the company has never approached them about the project.

Now the SEC is firing a shot across the bow of celebrities who do paid endorsements of cryptocurrencies.

"Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion," the SEC wrote in a Wednesday statement. "A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws."

Promoting token sales could also lead to "potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers."

This analysis depends on whether the tokens in question meet the legal definition of securities—something that's far from clear right now. Some cryptocurrencies, including Bitcoin, are likely to be classified as "utility tokens." While a utility might go up in value over time, their primary intended use is not as an investment vehicle. Bitcoin, for example, was designed as a new kind of payment network.

Unfortunately, the SEC has only made one significant ruling on the topic, writing in July that a blockchain-based investment scheme called the DAO amounted to an unregistered security. The SEC declined to press charges in that case, and it hasn't ruled on whether any other coin offerings have run afoul of securities law.

But that might change. "The SEC will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws," the agency wrote on Wednesday.

While SEC regulations are specific to the sale of securities, the Federal Trade Commission has broader regulations governing paid celebrity endorsements on social media more broadly. Guidelines first drafted in 2009 require celebrities to disclose when a product endorsement is the result of a paid endorsement deal.

https://arstechnica.com/tech-policy/2017/11/sec-warns-that-celebrity-cryptocurrency-endorsements-may-be-illegal/

...

It seems this falls under new legislation passed in 2009. Unfortunately it doesn't require anyone to disclose whether they're being paid to condemn a product. It might be nice to know if Jamie Dimon and others labeling bitcoin a bubble were being financially compensated for their efforts. There are many cases of celebrities having endorsed gold or silver. I don't remember the SEC ever flexing its muscles at people this way before for giving out endorsements. It is possible the SEC is invoking a double standard here where its only wrong to endorse bitcoin. Endorsing everything else is ok.

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[XbladeX]

**** It is possible the SEC is invoking a double standard here where its only wrong to endorse bitcoin. Endorsing everything else is ok.

Bitcoin was not issued by central autority like those tokens are. ICOs they sell produckts and this is ok for SEC to regulate it but who cares about US ?
There is so many countries where you can buy sell start your ICO you don't need be 1st at US.
Good product will defend it self.

[figmentofmyass]

it's odd that the article seems to use the term "cryptocurrencies" where they should be using "ICO tokens." ERC20 tokens may exist on a decentralized blockchain, but their issuance is completely centralized. they aren't cryptocurrencies. further, the SEC doesn't have jurisdiction over cryptocurrencies, so this article's title is really off base.

the crucial part of the statement i see here is "virtual token or coin that is a security." proof-of-work cryptocurrencies are not securities. in fact, not all ICO tokens are securities either (see the Howey test).

i'm surprised that these celebrities like paris hilton pumped these ICOs. she must have done it without talking to her lawyer first. her and mayweather looked like idiots. again, the author is dumb for comparing them to mike tyson for his promotion of bitcoin ATMs. those aren't securities....

It is possible the SEC is invoking a double standard here where its only wrong to endorse bitcoin. Endorsing everything else is ok.

nobody has gotten in trouble for endorsing bitcoin, and no regulator has suggested that endorsing bitcoin is wrong. what they are talking about is endorsing token sales, which are basically IPOs that flout securities laws.

[TimeTeller]

I think one major issue here is just because they can't get tax from them because they won't know how much they are being paid.
Just like here in my country, they can't control yet the use of cryptocurrency though they are regulating the local exchanges, still it's difficult for them to set tax regulations regarding your crypto earnings.

[pentol86]

i think, when celebrities use their money to invest in the crypto field, is not it possible they've thought of taxes and more. they have a strong lawyer. the problem here is the number of fake ICO.

[Lipe490]

This is so fuuny, one more time US is behaving like a children because Bitcoin is the only thing in the world they can't control. Ah and there's another thing called TAX that they can't track on cryptocurrency and IRS is so mad because of that. Celebrities do what they want with their money, plus this is attracting so many investments for the country, I don't really understand all that fud for bitcoin. I am not against rules in the bitcoin world, since they don't affect our power of choice and keep bitcoin decentralized.

[ivrynx]

i think the reason why they say celebrity endorsements on cryptocurrencies are illegal is they cannot track cryptocurrency transactions, and probably greed is also taking place, it is a fact that celebrities are being paid more, and that leads to them paying even more taxes, i think they should just let the celebrities endorse cryptocurrencies, since they are are tax payers. the right of a person to earn money, i think is being violated already due to high taxes, though we need it as a society to build projects to make a nation grow, the governments should allow cryptocurrencies to flourish as well, and give an option to the person if they want to earn in fiat or in bitcoin. what i see here is the government just wanted to have a piece of those earnings, well in fact, they can create their own cryptocurrency and let people invest on it, and in turn, they can also have a profitable cryptocurrency or what they can do is try to ask help from japan on how they did it with cryptocurrences and try to adapt it. i think this would not be an issue for them if the price of bitcoin is still below 1 usd, but now that it has gain strength overtime, it is timely that they warn people that it is illegal, however for cryptocurrencies created by celebrities, i think they can monitor it, since they have the technology, they just need some insiders to help them do it, but unfortunately they cannot do it with bitcoin.

[iamTom123]

Nothing really astounding here. It should be clear that Bitcoin is not the issue with this warning...the SEC is talking about ICO projects and if ever a celebrity is endorsing one it should be disclosed maybe for the purpose of getting some taxes for the said transaction (which is still very normal, anyway). Now any celebrity has the obligation to know what is that thing he or she is endorsing and this is true with the many types of products they are pushing to the market.

There is no clear-cut guidelines yet as to what can be a security and not a security (though we have Howey Test that anybody can use) so one has to be careful if the project is based in USA. We all know how strict is the SEC on this matter and if I am involved in an ICO I would launch my project somewhere else. The most important thing for now is that USA has not yet followed the path inspired by China -- total ban of both ICOs and Bitcoin exchanges.

Anyway, good thing am not a celebrity or else I can be in the hot seat of SEC!

[pinkflower]

The key phrase that we should take into consideration is they may be violating the law. It said MAY be violating the law, not IS DEFINITELY or POSITIVELY violating the law. So that takes it in a legal gray area.

Its a warning from the SEC that they can harass you, but from my perspective, they cant do anything else about it. Its a bluff until we witness some celebrity endorser get prosecuted.

[figmentofmyass]

The key phrase that we should take into consideration is they may be violating the law. It said MAY be violating the law, not IS DEFINITELY or POSITIVELY violating the law. So that takes it in a legal gray area.

Its a warning from the SEC that they can harass you, but from my perspective, they cant do anything else about it. Its a bluff until we witness some celebrity endorser get prosecuted.

not so sure about that analysis. the "may" relates to whether the asset being promoted is a security or not. nobody is coming after mike tyson for his promotion of bitcoin ATMs -- those aren't securities. the company facilitating money transfers with the ATMS are probably considered MSBs and therefore need licenses and to register with FINCEN. but that has nothing to do with the SEC or with mike tyson.

they can definitely do something about it. i think this is a warning to people like floyd mayweather before they really start coming after people. if celebrities are flouting the law this carelessly in 2-3 years, the hammer will be coming down on them. for now, i don't think anything will happen.

[Anonymous Kid]

I think its the SEC say; "Look, we know this is going on - We are paying attention and it is not going under our radar".

[Patatas]

This is so fuuny, one more time US is behaving like a children because Bitcoin is the only thing in the world they can't control. Ah and there's another thing called TAX that they can't track on cryptocurrency and IRS is so mad because of that. Celebrities do what they want with their money, plus this is attracting so many investments for the country, I don't really understand all that fud for bitcoin. I am not against rules in the bitcoin world, since they don't affect our power of choice and keep bitcoin decentralized.

US is not behaving like a 'child'.This is infact one of the most sophisticated ways of controlling the people. Democracy is just for the name sakes.

i think, when celebrities use their money to invest in the crypto field, is not it possible they've thought of taxes and more. they have a strong lawyer. the problem here is the number of fake ICO.

How do you know the celebrities are investing in the ICO's ?Even if they are it's their choice,the ico scams,they lose money I don't understand how any of this has anything to do with the US government.

[GreatOrchid]

Those celebrities are not investing in bitcoin and less in icos.. they are only getting paid by a fortune and this is why they try to spread the word about that ico/project.
and there is nothing new with that, maybe this is a new kind of advertising, but it is good to hear that they are willing to make publicity about cryptocurrencies..
I remember when floyd mayweather posted an image on instagram in where he was advertising a new ico, when it got the pre-ico it finished in about 10 minutes, probably because of him.

[Cloud27]

The Securities and Exchange Commission has issued a statement warning celebrities that they may be violating the law if they make paid endorsements of cryptocurrencies without disclosing the payments.

Promoting token sales could also lead to "potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers."

This is the same law that the Regulators applied to prosecute the man from Michigan.

https://cryptodaily.co.uk/2017/11/man-michigan-prosecuted-selling-bitcoin/

Promoting is not the issue, the regulators are only just exaggerating the issue. Celebrities will just disclose the endorsement payment and pay the equivalent taxes. I don't think these celebrities are willing to be paid by cryptocurrency, maybe they can get this endorsed cryptocurrency in other means.

[CrypticGambit]

Yes I heard that they are cutting the shills from the celebrities. Floyd maywheater was endorsing 2 icos. It was some gambling one, I believe it was stock and he also promoted a card type one and I think it was centra card or something like that. Also I remember paris hilton promoting some scam ico. I wonder if they will go to jail after that or atleast pay huuge fine, it is not right for someone who has 0 experience to promote some icos. this is stupid

[Za1n]

This is a non issue and I do not have any problem with the law or their statement on it. It really is not that big of a deal for a celebrity promoting an ICO to have a little disclaimer somewhere stating that they are being paid. You see this all the time on commercials on TC, so I doubt it would really turn anyone off from investing in the ICO. Actually, if the celebrity disclosed they accepted their compensation in whatever token they were promoting it would probably help more than it would hurt.

BTW, I agree with an earlier poster that they should make a law requiring disclosure for compensation from bashing a product as well. You can make as much, or more, money by shorting it as you can pumping it.

[pinkflower]

The key phrase that we should take into consideration is they may be violating the law. It said MAY be violating the law, not IS DEFINITELY or POSITIVELY violating the law. So that takes it in a legal gray area.

Its a warning from the SEC that they can harass you, but from my perspective, they cant do anything else about it. Its a bluff until we witness some celebrity endorser get prosecuted.

not so sure about that analysis. the "may" relates to whether the asset being promoted is a security or not. nobody is coming after mike tyson for his promotion of bitcoin ATMs -- those aren't securities. the company facilitating money transfers with the ATMS are probably considered MSBs and therefore need licenses and to register with FINCEN. but that has nothing to do with the SEC or with mike tyson.

they can definitely do something about it. i think this is a warning to people like floyd mayweather before they really start coming after people. if celebrities are flouting the law this carelessly in 2-3 years, the hammer will be coming down on them. for now, i don't think anything will happen.

Didnt you understand what I said? If the SEC said they may be violating the law, that doesnt mean they areviolating the law. Thats because they may not have some legal basis to form a case against someone. Its a just a warning or a bluff from the SEC.

Those celebrities might have also consulted with their lawyers before endorsing anything.

[exstasie]

The key phrase that we should take into consideration is they may be violating the law. It said MAY be violating the law, not IS DEFINITELY or POSITIVELY violating the law. So that takes it in a legal gray area.

Its a warning from the SEC that they can harass you, but from my perspective, they cant do anything else about it. Its a bluff until we witness some celebrity endorser get prosecuted.

not so sure about that analysis. the "may" relates to whether the asset being promoted is a security or not. nobody is coming after mike tyson for his promotion of bitcoin ATMs -- those aren't securities. the company facilitating money transfers with the ATMS are probably considered MSBs and therefore need licenses and to register with FINCEN. but that has nothing to do with the SEC or with mike tyson.

they can definitely do something about it. i think this is a warning to people like floyd mayweather before they really start coming after people. if celebrities are flouting the law this carelessly in 2-3 years, the hammer will be coming down on them. for now, i don't think anything will happen.

Didnt you understand what I said? If the SEC said they may be violating the law, that doesnt mean they areviolating the law. Thats because they may not have some legal basis to form a case against someone. Its a just a warning or a bluff from the SEC.

Those celebrities might have also consulted with their lawyers before endorsing anything.

I think the point was that whether the product/asset being promoted is considered a security under US law is the issue. It's a warning but I don't think it's a bluff at all. People are already getting arrested for securities fraud for fraudulent ICOs.

Whether or not an asset (like an ICO token) is a security is decided by the facts of the case. It's not like the SEC goes around giving ICO promoters guidance regarding whether they are in compliance. Any token offering that serves as an investment scheme in a company would be deemed a security.

The statement is actually quite clear:

Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion," the SEC wrote in a Wednesday statement. "A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.

[GreenBits]

The key phrase that we should take into consideration is they may be violating the law. It said MAY be violating the law, not IS DEFINITELY or POSITIVELY violating the law. So that takes it in a legal gray area.

Its a warning from the SEC that they can harass you, but from my perspective, they cant do anything else about it. Its a bluff until we witness some celebrity endorser get prosecuted.

not so sure about that analysis. the "may" relates to whether the asset being promoted is a security or not. nobody is coming after mike tyson for his promotion of bitcoin ATMs -- those aren't securities. the company facilitating money transfers with the ATMS are probably considered MSBs and therefore need licenses and to register with FINCEN. but that has nothing to do with the SEC or with mike tyson.

they can definitely do something about it. i think this is a warning to people like floyd mayweather before they really start coming after people. if celebrities are flouting the law this carelessly in 2-3 years, the hammer will be coming down on them. for now, i don't think anything will happen.

this is legit in my eyes. this honestly doesnt have anything to do with unpaid taxes, this is all about promotion without disclosure. its illegal to advertise at people without them knowing you are advertising at them; in the united states this essentially amounts to fraud as the failure to disclose is considered an act of deception.

its not that they are promoting these things; its the fact that they arent saying they are being paid to do so. shilling is illegal for any product, without informing someone the rhetoric is essentially marketing, and not a genuine opinion.

[Omega Weapon]

The key phrase that we should take into consideration is they may be violating the law. It said MAY be violating the law, not IS DEFINITELY or POSITIVELY violating the law. So that takes it in a legal gray area.

Its a warning from the SEC that they can harass you, but from my perspective, they cant do anything else about it. Its a bluff until we witness some celebrity endorser get prosecuted.

This, I think this is just a way for the SEC to say to everyone else, stop doing this or you may get in trouble with us and since no one wants to get trouble with them then I think the days of celebrities endorsing cryptocurrencies are going to be over soon, which is not a bad thing since who cares if Paris Hilton is endorsing a project, she does not know anything about crypto and her word means nothing in this forum.