Enforcement News: SEC Charges Movie Actor With Unlawfully Touting Cryptocurrency OfferingPrint Article
- Posted on: Mar 7 2020
Endorsements from the rich and famous, such as movie and television stars, professional athletes, and musicians, can be found on TV, radio, and social media. Virtually any product or service can be endorsed by a celebrity. Sometimes the endorsement concerns investment opportunities. But, as the Securities and Exchange Commission (“SEC” or the “Commission”) has warned, “a celebrity endorsement does not mean that an investment is legitimate or that it is appropriate for all investors.” (Here.) For this reason, investors should not rely on celebrity endorsements when making an investment decision.
Moreover, celebrity endorsements may be unlawful if they do not disclose the nature, source, and amount of compensation paid, directly or indirectly, by the company in exchange for the endorsement. A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws. Celebrities making such endorsements may also be liable for violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, for making false and misleading statements in connection with the sale of securities, and for acting as unregistered brokers.
Celebrity endorsements of initial coin offerings (“ICOs”), in which companies raise money by selling digital tokens instead of shares, have become increasingly common. The hype surrounding Bitcoin has caused the SEC to publicly warn that celebrity promotions could be unlawful if the compensation paid to the celebrity was not disclosed.
In 2018, the SEC charged boxer Floyd Mayweather and music producer DJ Khaled with failing to disclose that they were compensated for promoting ICOs. (Here.) Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest to settle the charges with the Commission. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest. In addition, Mayweather agreed not to promote any securities, digital or otherwise, for three years, and Khaled agreed to a similar ban for two years. These were the SEC’s first cases to charge touting violations involving ICOs.
On February 27, 2020, the SEC announced (here) that it settled charges against the movie actor Steven Seagal (“Seagal”) for failing to disclose payments he received for promoting an investment in an ICO conducted by Bitcoiin2Gen (“B2G” or the “Company”), an international online company. Seagal, who served as “brand ambassador” for B2G, agreed to pay $314,000 in disgorgement and penalties in connection with the settlement.
From approximately February 12, 2018 through March 6, 2018 (the “Relevant Period”), Seagal promoted, on Twitter and Facebook, an ICO by B2G in which the Company offered and sold digital tokens (“B2G tokens”) on the Ethereum blockchain. At the time, Seagal had approximately 107,000 Twitter followers and 6.7 million Facebook followers.
The Company described B2G tokens as “the next generation of Bitcoin.” According to B2G, the Company was conducting an ICO to raise capital to build an “ecosystem” that would allow users to trade B2G tokens, provide wallet staking, and trade altcoins and fiat currencies, all “on a secure, comprehensive platform.” Participants in the ICO invested Bitcoin, U.S. Dollars, Euros, or made payments via credit card in exchange for B2G tokens.
B2G’s marketing materials contained numerous statements that the B2G tokens would rise in value as a result of the efforts of B2G and its agents, and that, at a minimum, investors would receive a guaranteed return each month. B2G’s marketing materials also highlighted that the Company and its agents would ensure a secondary trading market for B2G tokens after the ICO, noting the ability for investors to liquidate and trade B2G tokens on digital-asset platforms following the token sale, including its own secondary trading platform. B2G’s marketing materials further emphasized the purported expertise of B2G’s management.
Pursuant to a contract between Seagal and the entity controlling B2G (the “Endorsement Agreement”), Seagal was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotion of B2G.
Consistent with the Endorsement Agreement, on February 12, 2018, B2G announced (here) that Seagal would endorse its ICO. The press release quoted Seagal as saying: “I endorse this opportunity wholeheartedly . . . I am excited about the management, and especially about the secure blockchain, underlying mining technology, and safeguards.” The press release did not disclose that Seagal was being paid for the promotion. Section 17(b) of the Securities Act of 1933 makes it unlawful for any person to promote a security without fully disclosing the receipt and amount of consideration paid for such promotion.
Shortly thereafter, Seagal began promoting B2G’s ICO on social media by posting or authorizing his agents to post at least nine touts. The Company paid Seagal approximately $157,000 for these promotions. Seagal did not, however, disclose in his posts any information about the fact or amount of compensation he received, or was to receive, from B2G for making the promotions.
Seagal’s promotion of the B2G ICO occurred more than six months after the SEC issued the DAO Report of Investigation indicating that virtual tokens or coins sold in ICOs may be securities, and thus, subject to the federal securities laws (here). Seagal’s promotion of the B2G ICO also occurred nearly four months after the SEC’s Division of Enforcement and Office of Compliance Inspections and Examinations issued a public statement reminding market participants that 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, and that a failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws (here).
In March 2018, the Company received a cease-and-desist order from the state of New Jersey for “fraudulently offering unregistered securities in violation of the Securities Law.” (Here.) The order noted that B2G’s press release about Seagal did not disclose the nature, scope or amount of compensation paid to Seagal for his promotion of the investment.
“[I]nvestors were entitled to know about payments Seagal received or was promised to endorse this investment so they could decide whether he may be biased,” said Kristina Littman, Chief of the SEC Enforcement Division’s Cyber Unit. “Celebrities are not allowed to use their social media influence to tout securities without appropriately disclosing their compensation.”
Without admitting or denying the SEC’s findings, and to settle the charges, Seagal agreed to pay $157,000 in disgorgement, which represented his actual promotional payments, plus prejudgment interest, and a $157,000 penalty. In addition, Seagal agreed not to promote any securities, digital or otherwise, for three years.
The SEC’s order can be found here.
Celebrity endorsements are a fact of life. Investors should be aware that the celebrity endorser is most likely being compensated for the endorsement, no matter how unbiased the pitch may appear. For this reason, investment decisions should not be based solely on an endorsement by a famous person or other individual.
If an investor is relying, in whole or in part, on a particular endorsement or recommendation, he/she should learn more about the relationship between the celebrity and the company and consider whether the recommendation is independent or a paid promotion. Investors should be fully informed about the opportunity they are investing in. In short, investors should conduct their own research before making investments.