On November 1, the US Securities and Exchange Commission’s (SEC) Division of Enforcement and the SEC’s Office of Compliance Inspections and Examinations jointly released a public statement warning that celebrity endorsements of token offerings “may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.” Token offerings, colloquially known as ICOs, have become a popular means for startups in the nascent blockchain industry to secure funding, especially early on in the life of a company.
On the same day, the Commission’s Office of Investor Education and Advocacy (OIEA) issued an alert to would-be investors, cautioning them “not to make investment decisions based solely on celebrity endorsements.”
In bold text, the alert admonished the public to bear in mind that “it is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.” In the public statement, the SEC added that it encourages investors “to research potential investments rather than rely on paid endorsements from artists, sports figures, or other icons” who “often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.”
The alert explained that celebrities may have ulterior motives for praising a product, such as a financial stake in that product’s success, or may themselves have been tricked into participating in a fraudulent investment scheme. Furthermore, the public statement notes that in light of the Commission’s findings in its investigation of The DAO, celebrities who endorse tokens that double as securities but fail to “disclose the nature, scope, and amount of compensation received in exchange for the promotion” do so in “violation of the anti-touting provisions of the federal securities laws.” These individuals “may also be liable for 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.”
The alert suggests methods by which potential investors might research investment opportunities before putting money into them and provides several online resources intended to help them conduct this due diligence, including a link to an OIEA bulletin from August 2017 that discusses token offering scams.
These warnings come after several months of buzz around celebrity token offering endorsements. Personalities who have urged the public to invest in particular crypto firms include Floyd Mayweather, Ghostface Killah, DJ Khaled, Jamie Foxx, and Paris Hilton.