Online cryptocurrency promotion—and promotion on social media in particular—has garnered national media attention in recent months. First, the U.S. Securities and Exchange Commission (SEC) announced that it had entered into a $1.26 million settlement with Kim Kardashian in relation to her promotion of EthereumMax (EMAX) on Instagram. Then, in the wake of the FTX collapse, several media outlets have covered lawsuits targeting Tom Brady, Gisele Bündchen, Stephen Curry, Shaquille O’Neal, and other celebrities who all promoted the platform before it came crashing down.

Promoting cryptocurrency investment opportunities can be extremely lucrative for athletes, celebrities, and other high-profile individuals—with many earning hundreds of thousands of dollars for individual posts and stories. But, it can be extremely risky as well. While there is nothing inherently unlawful about promoting cryptocurrency online, promoters must do it the right way to avoid SEC scrutiny and civil litigation.

“With token issuers and trading platforms offering substantial fees, it isn’t surprising that many celebrities are dipping their toes in the world of online cryptocurrency promotion. But, as several recent cases show, doing so without a clear understanding of the rules that apply can prove extremely costly.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

Defending Against SEC Investigations and Enforcement Actions

The SEC has prioritized cryptocurrency-related enforcement over the past few years. Cryptocurrency-based companies and trading platforms are subject to the SEC’s oversight, and the Commission takes the position that most cryptocurrencies themselves qualify as securities as well. With cryptocurrencies—including established tokens such as Bitcoin and new alternative coins (or “altcoins”)—booming in popularity, the SEC has struggled to keep pace. Even with major setbacks like the FTX collapse, cryptocurrency remains a popular choice among retail investors, and the SEC is using the tools and resources it has available to ensure that these investors are able to make informed decisions (if they choose to do so).

Along with targeting companies and firms that flout the SEC’s registration and disclosure requirements, this includes targeting athletes, celebrities, and other high-profile individuals who promote cryptocurrency investment opportunities on Instagram, Twitter, Tik Tok, and other social media platforms.

Fundamentally, there is nothing wrong with celebrities promoting cryptocurrency-related investments. Cryptocurrency companies and investment firms can advertise their products and services; and, just like other advertisers, they can pay celebrities to help boost their exposure. The risk for celebrities comes from the SEC’s stringent—and, for many, surprisingly broad—transparency requirements.

Most cryptocurrency promotions are subject to rules and regulations beyond those that apply to other types of social media endorsements. While most influencers must simply comply with the U.S. Federal Trade Commission’s (FTC) Endorsement Guidelines (and other general false advertising consumer protection rules), those who promote securities must comply with the SEC’s requirements as well.

For example, while the FTC notes that “simple and clear language,” such as an “ad” or “sponsored” hashtag, will often be enough, the SEC takes a decidedly different approach. Although Kim Kardashian labeled her EthereumMax (EMAX) post as an “ad,” this failed to satisfy the SEC’s requirements—with the SEC’s Gurbir S. Grewal noting that, “[t]he federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion.” Similarly, SEC Chair Gary Gensler has stated that, “the law requires [celebrities] to disclose to the public when and how much they are paid to promote investing in securities.”

When targeted by the SEC for their cryptocurrency-related promotional posts, athletes, celebrities, and other high-profile individuals must make informed and strategic decisions about their defense. These cases are somewhat unique in that a single social media post (which is publicly available) may be all that the SEC needs to substantiate charges. Even so, targeted individuals can—and should—defend themselves, whether this means negotiating a settlement that minimizes liability or arguing that a particular promotional post falls outside of the SEC’s securities-related jurisdiction.

If the SEC has jurisdiction—and if there is no way to argue that a post failed to reach a high-profile individual’s millions of followers—mitigating liability may involve challenging the SEC’s evidence of intent. While ignorance of the law generally does not provide a complete defense in securities fraud cases, demonstrating lack of intent can keep certain penalties off of the table. If a celebrity’s defense counsel can demonstrate that the celebrity had no intent to violate the law, then criminal prosecution is certainly unwarranted, and it may be possible to resolve the SEC’s investigation with relatively modest (if any) financial consequences.

With all of that said, individuals targeted by the SEC for cryptocurrency-related disclosure violations should not dismiss the possibility of asserting a complete defense out of hand. While some promotional social media posts will violate federal securities laws and regulations, others will not. When facing SEC scrutiny, an informed approach is paramount, and targeted individuals need to be able to rely on their defense counsel to guide them forward.

Defending Against Civil Lawsuits Alleging Investor Fraud

Along with SEC enforcement action, making inadequate disclosures when promoting cryptocurrency investment opportunities on social media can also lead to private civil litigation. The FTX collapse has spurred lawsuits against several celebrities already, and it is widely expected that many similar lawsuits will follow. In these lawsuits, plaintiffs’ lawyers are pursuing claims related not only to the inadequate disclosure of celebrities’ financial relationships, but to the substance of celebrities’ endorsements as well. For example, a class action lawsuit filed against Stephen Curry and others alleges that the NBA star misled investors by stating, “With FTX I have everything I need to buy, sell, and trade crypto safely.” It contains numerous similar allegations against other athletes and celebrities as well.

The lawsuit, which was filed in Florida in November 2022, alleges violations of Florida’s Securities and Investor Protection Act and the state’s Deceptive and Unfair Trade Practices Act. The lawsuit also includes a count for civil conspiracy, alleging that, “The FTX Entities and Defendants made numerous misrepresentations and omissions to Plaintiff and Class Members about the Deceptive FTX Platform in order to induce confidence and to drive consumers to invest in what was ultimately a Ponzi scheme, misleading customers and prospective customers with the false impression that any cryptocurrency assets held on the Deceptive FTX Platform were safe and were not being invested in unregistered securities.”

Here, too, while it may be difficult to dispute the fact that individual celebrities engaged in online promotion, these celebrities may still have a variety of defenses available. For example, when making statements about the FTX platform, they have believed—and reasonably so—what they said at the time. Likewise, whether these celebrities engaged in a conspiracy to defraud investors or were defrauded themselves is a key issue—and one that would currently appear to lean in the celebrities’ favor.

With the publicity surrounding FTX’s collapse and the ensuing litigation against big-name celebrities, it is highly likely that we will see similar litigation in the future. This litigation may involve past social media promotions or online endorsements that are yet to be made. In either case, defending against unwarranted liability will require a strategic approach, and targeted athletes, celebrities, and other high-profile individuals will need to have highly experienced defense counsel on their side. When facing civil litigation, defendants should assess the risk of facing SEC scrutiny as well; and, if this appears to be a risk, they should factor this into their overall defense strategies.

Avoiding Unwanted Scrutiny for Online Cryptocurrency Promotions and Endorsements

Of course, when it comes to avoiding liability in SEC enforcement actions and civil litigation related to only cryptocurrency promotions and endorsements, the best option is to avoid these proceedings entirely. Athletes, celebrities, and other high-profile individuals can do this by taking a proactive approach to compliance.

When crafting social media posts and stories for promotional campaigns, it is imperative to work with legal counsel who has experience in all pertinent areas. For example, in Kim Kardashian’s case, it appears that she received some advice—as she labeled her story as an “ad” and noted that she was not providing financial advice. However, it is also clear that she did not receive all of the advice she needed.

While hindsight is 20/20, it appears that many of the celebrities who got caught up in the FTX collapse may have received less-than-adequate advice as well. As alleged in the Florida class action lawsuit, several of these celebrities made strong statements about the safety and utility of the FTX platform. Even if these statements appeared to be true based on the information they had at the time, it may have been prudent to limit the scope of their endorsements. Going forward, celebrities who endorse and promote cryptocurrency-related investments should keep this in mind, and they should craft their endorsements with the expectation that any incomplete disclosures or unsubstantiated claims could lead to SEC scrutiny, civil lawsuits, or both.