Celebrity Influencers Now Causing Trouble With … Investments?

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The new trend in celebrity endorsements without disclosing connections or affiliations: promoting stocks and other investments, according to a Public Statement from the Securities and Exchange Commission.

While the Federal Trade Commission has previously cautioned celebrities and social media influencers about failing to disclose a material connection between an endorser and a product, the Statement from the SEC’s Division of Enforcement and Office of Compliance Inspections and Examinations presents a new wrinkle.

“Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments,” the agency said, citing recent promotions for investments in Initial Coin Offerings and virtual tokens. “These endorsements 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.”

The SEC warned endorsers about the potential for enforcement action.

“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. “A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws. Persons making these endorsements 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 agency did not call out any celebrities by name or cite examples of potentially illegal promotions, but several high-profile individuals—from actor Jaime Foxx to celebutante Paris Hilton to music’s DJ Khaled—have touted various forms of cryptocurrency in recent months.

Accompanying the Public Statement was an Investor Alert that advised investors to use caution when considering investment opportunities backed by movie stars and professional athletes. “[A] celebrity endorsement does not mean that an investment is legitimate or that it is appropriate for all investors,” the SEC said. “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”

To read the SEC’s Public Statement, click here.

Why it matters: Celebrities—already facing scrutiny from the FTC for potential violations of the Endorsement Guides, which require a clear and conspicuous disclosure of any “material connection” between an endorser and the marketer of a product—must also keep in mind the requirements of federal securities law if promoting stocks and investments. The Public Statement noted that the failure to disclose “the nature, scope, and amount of compensation received in exchange for the promotion” could result in violations of the anti-touting and anti-fraud provisions as well as the possibility of acting as an unregistered broker. “The SEC will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws,” the agency noted.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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