Paris Hilton, Floyd Mayweather, Jamie Foxx and other celebrities have all recently promoted Initial Coin Offerings (ICOs) to their social media followers. But as celebrity promotion and endorsement of ICOs and other investments gain steam, the Securities and Exchange Commission is reminding them to heed federal securities laws. In a November 1, 2017 joint statement from the SEC’s Enforcement Division and the SECs Office of Compliance Inspections and Examinations, the SEC noted that it has publicly taken the position that tokens and coins may qualify as “securities” under the federal securities laws (see the DAO Report, available here), and warned that the promoters of a virtual token or coin that is a security “must disclose the nature, scope, and amount of compensation received in exchange for the promotion.” Moreover, promoters of tokens or coins that are securities may be liable for violations of the anti-fraud provisions of the securities laws, for participating in an unregistered offering or sale of securities (assuming that the issuer of the token/coin did not register the offering with the SEC as a securities offering), and for acting as an unregistered broker-dealer. Although the SEC directed its public statement at celebrities and social media influencers, the warning applies to anyone endorsing securities offerings.
The SEC also warned the public that celebrities “often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws.” This would seem to be especially true for ICOs and other cryptocurrency offerings that, in contrast to traditional celebrity endorsements, are both highly technical and new to the investing public.
We expect the SEC to continue to be active in the area of ICOs. When it issued the DAO Report in July of this year, it also issued an investor bulletin on ICOs, followed by an investor alert in August relating to public companies making ICO-related claims. Moreover, the SEC has shown signs of being active on the enforcement front. On September 29, 2017, the SEC sued a company called REcoin for an illegal unregistered securities offering in connection with REcoin’s ICO.