Promoting securities, cryptocurrency, and other investment opportunities is fraught with legal risks. Individuals who engage in promotional activities must ensure that they have a clear understanding of the federal laws and regulations that apply, and they must take proactive steps to address the pertinent legal and regulatory requirements before they post anything online. Not only can illegal promotions lead to civil enforcement action by the U.S. Securities and Exchange Commission (SEC) and other federal agencies, but in some cases they can lead to criminal prosecution as well.

So, what does it take to avoid scrutiny from the SEC (and the U.S. Department of Justice (DOJ))? The short answer is, “It depends.” While all individuals who promote investment opportunities online have compliance obligations, specific obligations vary for individuals who engage in promotions in different capacities.

“Brokers, company insiders, celebrities, and other individuals who promote investments online all have obligations to ensure that they provide accurate information to prospective investors. But, depending on an individual’s role, that individual may have various other responsibilities as well.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

With this in mind, understanding an individual’s obligations (and risks) starts with understanding how the individual is viewed from a legal and regulatory perspective. Broadly speaking, most individuals who promote securities, cryptocurrency, and other investment opportunities online will fall into one of three categories: (i) promoters, (ii) endorsers, or (iii) brokers.

Promotor Rules and Regulations

For federal compliance purposes a securities “promoter” has a specific definition under the SEC’s regulations. Under 17 C.F.R. Section 240.12b-2, a promoter is defined as:

“(i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or

“(ii) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.”

As you can see, this covers a relatively small subset of individuals—and this helps explain the distinction between promoters and others who endorse investment opportunities online. Somewhat confusingly, the SEC also uses the colloquial term “promoter” more broadly in some contexts as well. But, if an individual qualifies as a promoter under Section 240.12b-2, then the individual is subject to additional rules and requirements, and violations of these rules and requirements—whether intentional or inadvertent—can create substantial civil (or criminal) liability exposure.

Endorser Rules and Regulations

Individuals who promote securities, cryptocurrency, and other investment opportunities online but do not qualify as “promoters” under Section 240.12b-2 must comply with the SEC’s and other federal agencies’ marketing and endorsement rules. These include, but are not limited to, the SEC’s Final Rule issued at the end of 2020 and the Federal Trade Commission’s (FTC) Endorsement Guidelines.

Endorsers include individuals who get paid to promote investment opportunities. These individuals do not qualify as “promoters” because they do not “take initiative” in the issuer’s business or receive 10 percent or more of the financial benefits of the offering. Nonetheless, they are bound by federal law to ensure that they are providing accurate and non-misleading information to prospective investors; and, generally speaking, they must disclose their financial relationships as well.

One of the most high-profile securities endorsement cases in recent years was the SEC’s settlement with Kim Kardashian. In October of last year, Kardashian agreed to pay $1.26 million to settle allegations that she “failed to disclose that she was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax.” The settlement included penalties, disgorgement, and interest, and the SEC also reported that Kardashian agreed to cooperate with its ongoing investigation into the promotion of EMAX tokens.

In its press release, the SEC quotes Chair Gary Gensler as saying, "Ms. Kardashian’s case . . . serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities.” Again, this obligation relates not to a celebrity’s status as a “promoter” (as celebrities often won’t qualify as promoters under Section 240.12b-2), but instead to the general obligation to disclose the nature and terms of paid online endorsements.

Broker Rules and Regulations

Of course, securities brokers are subject to their own unique set of federal rules and requirements. Brokers are required to register with the SEC and a self-regulatory organization such as the Financial Industry Regulatory Authority (FINRA), and they must meet extensive disclosure, recordkeeping, and transactional requirements. While brokers may not qualify as “promoters” or need to meet the compensation disclosure requirements that apply to endorsers, they must nonetheless undertake extensive measures to ensure that they provide accurate information to prospective investors and otherwise meet their compliance obligations.

One of the risks that promoters and endorsers can face in some cases is the risk of being deemed an unregistered broker. Acting as an unregistered broker has consequences above and beyond those of publishing misleading promotions or endorsements. While acting as an unregistered broker also involves going above and beyond promoting an investment opportunity online, this is nonetheless a risk of which all promoters and endorsers should be aware.

Complying with the Pertinent Online Promotion Requirements

For all promoters, endorsers, and brokers, complying with the pertinent online promotion requirements involves taking a proactive approach to assessing (and addressing) the laws, rules, and regulations that apply. While compliance can be relatively straightforward in some (though not all) cases, an informed and careful approach is critical, as even minor mistakes and oversights can trigger both scrutiny and penalties.

To address their SEC compliance obligations when advertising securities, cryptocurrency, and other investment opportunities online, individuals should:

• Conduct a Compliance Needs Assessment – Since compliance obligations vary depending upon an individual’s specific role in promoting an investment opportunity, all individuals must conduct a compliance needs assessment to ensure that they have a clear understanding of all applicable requirements. Conducting this assessment also ensures that individuals do not spend time, money, and effort complying with requirements that don’t apply.
• Identify All Pertinent Disclosure Requirements – After assessing their needs, promoters, endorsers, and brokers can then identify all pertinent disclosure requirements. Depending on an individual’s role, these requirements may exist under SEC rules, FTC rules, FINRA rules, federal securities laws, and other sources of statutory or regulatory authority.
• Identify Any Other Applicable Legal or Regulatory Requirements – This applies primarily to promoters and brokers, though celebrities and others who endorse investment opportunities may have obligations beyond disclosure as well. For example, to avoid publicizing false or misleading information, endorsers may need to conduct suitable due diligence before posting anything online.
• Manage Compliance on an Ongoing Basis – Due to the risks involved with promoting investment opportunities online, all individuals who engage in promotional activities should also take steps to proactively manage compliance on an ongoing basis. Among other things, this means monitoring for any information that may impact the accuracy of their public statements, as well as ensuring that all future posts comply with the applicable disclosure and anti-fraud requirements.

For those who may have committed disclosure (or other) violations in the past, mitigating risk in this scenario requires a very careful approach. From a federal law enforcement perspective, in many cases, the harm caused by disclosure violations cannot be undone. However, there are still options available—and choosing the right option is generally a matter of gaining a clear understanding of all pertinent facts, risks, and potential means of resolution.

Defending Against an SEC (or DOJ) Investigation or Enforcement Action

Of course, in some cases it will be too late for promoters, endorsers, and brokers to address their compliance obligations proactively. Once a federal agency launches an investigation, it is imperative not only to come into compliance, but also to address the implications of any past compliance failures.

While there are a variety of ways to deal with SEC, FTC, and DOJ investigations, avoiding unnecessary liability requires an informed and strategic approach that takes into account the realities at hand. Whether it makes sense to dispute the allegations or focus on settlement will depend on the circumstances presented; and, in all cases, targeted individuals will typically want to prioritize finding a resolution that avoids federal criminal charges. Not only does this keep federal prison time off of the table, but it also avoids the reputational harm and other collateral consequences of being forced to defend against criminal allegations in federal court.