SEC warns about legal dangers of celebrity endorsements of ICOs
The US Securities and Exchange Committee (SEC) has warned that celebrities who promote initial coin offerings (ICOs), in which the tokens are regarded as securities, must ensure they comply with federal legislation. In a statement, the SEC said the nature, source and amount of compensation received in exchange for the promotion must be disclosed. Celebrities failing to do so risk falling foul of the anti-touting provisions of federal securities laws. The statement also urged potential investors to seek professional advice on ICOs, as famous faces are not necessarily financial experts.

Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments. 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’s Enforcement Division and Office of Compliance Inspections and Examinations encourage investors to be wary of investment opportunities that sound too good to be true. We encourage investors to research potential investments rather than rely on paid endorsements from artists, sports figures, or other icons.

Celebrities and others have recently promoted investments in Initial Coin Offerings (ICOs). In the SEC’s Report of Investigation concerning The DAO, the Commission warned that virtual tokens or coins sold in ICOs may be securities, and those who offer and sell securities in the United States must comply with the federal securities laws. 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. 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 SEC will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws.

Investors should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion. Investment decisions should not be based solely on an endorsement by a promoter or other individual. Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws. Conduct research before making investments, including in ICOs. If you are relying on a particular endorsement or recommendation, learn more regarding the relationship between the promoter and the company and consider whether the recommendation is truly independent or a paid promotion. For more information, see an Investor Alert that the SEC’s Office of Investor Education and Advocacy issued today regarding celebrity endorsements.

Additional Resources

Investor Bulletin: Initial Coin Offerings

Investor Alert: Public Companies Making ICO-Related Claims

Investor Alert: Social Media and Investing – Avoiding Fraud