Should Influencers Be Held Liable for the Promotion of Digital Assets?

May 16, 2023

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The world’s ever-changing technological landscape has led to the formation of new mediums of creativity — mediums that the sports and entertainment industry cannot ignore. Digital currencies, virtual universes, and enhanced gaming platforms are just a few drops in the new-tech wave that is crashing onto industries and headlines everywhere. As a result, many attorneys have invested their time attempting to understand these technologies, while keeping an eye on the policy pipeline, in order to properly advise their clients. With each new technology — and each new use of said technology — comes a deluge of legal questions. The sports and entertainment industry has dipped its toes in the digital asset market in recent years through various sponsorships and collaborations, but what are the risks associated with jumping into the deep end of the digital asset pool?

Apps such as Instagram, Snapchat, TikTok, Twitch, and Twitter, to name a few, have become the frontlines for brands to market goods and services directly to their respective target audiences. The prevalence of influencer-based social media marketing can be evidenced by the Federal Trade Commission’s release of “Influencer Guidelines” in 2019, in an attempt to add transparency to the marketplace by having influencers disclose when posts were paid-for promotions. [1] It is common for brands to utilize influencers such as athletes and celebrities to supplement their traditional advertising. The incentive for influencer participation is rooted in the opportunity to bolster their earnings outside their respective professions without the risk of injury (for athletes) or staying in the front of the public’s mind (for celebrities). For example, the top 10 highest paid athletes in 2021 raked in a total of $992 million, more than half (around 51%) of which came from “off-field” sources such as sponsorship and endorsements. [2]

New Technologies Raise Gray Areas

With newer technologies comes murky waters. Legal concerns around digital assets have grown as the technologies become increasingly more prevalent. Intellectual property issues such as trademark and copyright infringement are becoming common. [3] Other risks include ownership and licensing, money-laundering, and gambling. [4] Another issue that has been under the legal microscope is whether the U.S. Securities and Exchange Commission (“SEC”) considers these digital assets to be securities.

In 2017, the SEC released its “Statement Urging Caution Around Celebrity Backed ICOs [5]” where it stated that “ . . . virtual tokens or coins sold in ICOs (Initial Coin Offerings) may be securities . . .” and, thus, subject to securities laws. [6] Combining the ease and reach of direct-to-consumer social media marketing with the murky status of digital assets has proven to be a dangerous mix as numerous influencers have found themselves in hot water with the SEC since its 2017 warning statement.

The SEC’s goal is to protect investors and keep markets fair and efficient. The Securities Act of 1933 (the “Act”) attempted to do just that by tackling securities fraud. Section 17(b) of the Act, commonly referred to as the “anti-touting provision,” requires individuals to disclose the amount and source of the compensation they receive for any endorsement or promotion of a security. Under Section 17(b), it is unlawful:

“ . . . to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.” [7]

In order to comply with Section 17(b), influencers would need to disclose who is paying them for their promotion as well as how much compensation they are receiving. In reality, it is unlikely that this cumbersome and distasteful disclosure would sit well with the target audience if made in a commercial or social media post. However, without it, influencers are lining themselves up for investigation and enforcement from the SEC.

And If the SEC Finds Fault With You …

The first notable influencer to receive SEC punishment in connection with touting a digital asset was Kim Kardashian in October 2022 for an Instagram post promoting EthereumMax. [8] Kardashian’s penalty included turning over the $250,000 she received for the promotion as well as a $1 million fine paid to the SEC. [9] Although the SEC made a splash with enforcement against someone with the global following of Kardashian, the message didn’t seem to stick as charges against influencers are still being made. [10] Another notable action by the SEC involved Basketball Hall of Famer Paul Pierce, who promoted EthereumMax products through his Twitter account. Pierce failed to make proper Section 17(b) disclosures, as well as other misrepresentations, and as a result, agreed to pay the SEC $1.4 million. [11]

In the wake of the collapse of FTX, and the subsequent arrest of its founder, class action suits have been filed in Florida seeking damages for the lost funds of investors. [12] These suits are even calling out the influencers who promoted the cryptocurrency exchange, including Tom Brady, Gisele Bundchen, Larry David and Steph Curry, to name a few. The crux of the complaint hinges on whether the FTX yield-bearing accounts are securities. If so, under the Florida Securities and Investor Protection Act, their promotional activities in selling unregistered securities may have been unlawful, subjecting them to liability for “… aiding in the making of the sale.” [13] Regardless of the securities ruling, plaintiffs in the Florida class action seek damages under Florida’s Deceptive and Unfair Trade Practices Act. [14]

Conclusion

The lack of policy on digital assets and the ease of marketing through social media has created a volatile concoction that has many of today’s influencers in hot water. If one is to promote a security in the United States, disclosure of the amount and source of their compensation is required by Section 17(b). Until further clarity is given by the SEC in connection with digital assets as securities, it is likely that there will be a lull in influencer-based marketing for these products due to the risk of enforcement from the SEC. Influencers’ handlers and attorneys should conduct proper due diligence before signing up their clients for digital asset promotional activities, as their clients’ status may have unintended consequences.

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[1] www.ftc.gov/system/files/documents/plain-language/1001a-influencer-guide-508_1.pdf

[2] www.forbes.com/sites/brettknight/2022/05/11/the-worlds-10-highest-paid-athletes-2022/?sh=791bcec51f6c

[3] NFTs: New Frontiers for Trademarks, Global IP & Technology Law Blog

[4] Tokenization and the Law: Legal Issues with NFTs, The National Law Review, accessed at

www.natlawreview.com/article/tokenization-and-law-legal-issues-nfts

[5] Initial coin offering.

[6] www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos

[7] 15 U.S.C.A. § 77q(b) (West)(Securities Act § 17(b))

[8] www.sec.gov/news/press-release/2022-183

[9] Id.

[10] www.sec.gov/news/press-release/2023-59

[11] www.sec.gov/news/press-release/2023-34