Celebrities, influencers, and other forms of promoters are learning their lesson when it comes to disclosing payments for their endorsements. On October 3, 2022, Kim Kardashian settled with the Securities and Exchange Commission (SEC) for the violation of Section 17b of the Securities Act of 1933 to the tune of $1.26 million. This provision expressly requires individuals to disclose the amount they were paid for promotions encouraging investment in securities including cryptocurrency. This makes the endorsee liable for acting as an unregistered broker participating in unregistered offers and sales of securities and can hold them liable for any subsequent violations of anti-fraud provisions of the federal securities act.
This wave of legal action was put in place by the SEC after Kardashian promoted the cryptocurrency company EthereumMax in a series of Instagram stories that reached her 332 million followers, and denoted the Instagram stories as an ad only by using hashtags. The SEC found these actions were unclear and did not clearly show that Kardashian was paid. This was similar to the actions that the SEC took against professional boxer Floyd Mayweather Jr. and music producer DJ Khaled who also did not disclose a material connection in their endorsement of digital currencies.
Those partaking in similar types of promotional activities should take this action by the SEC, and similar actions taken by the Federal Trade Commission (FTC), as a lesson on disclosing payments for the promotion of securities. Acts violating this law make the endorsee liable as an unregistered broker and can include further anti-fraud provisions. Consumers are further hard-pressed to not trust everything that they see online as endorsements do not always mean expertise within a certain industry. This can be seen in the successful endorsements of cryptocurrencies by celebrities in the past such as Matt Damon, Tom Brady, Reese Witherspoon, and Gwyneth Paltrow. Although not illegal, none of these endorsees has a degree or certification as a broker meaning they do not have the educational background to make professional recommendations on sales or securities. These endorsements can then still cause harm without violating the law as the endorsees lack credibility and can subsequently reflect poorly on the fiduciary duty of the business.
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