What To Know About (Legally) Marketing Crypto Assets

October 25, 2022

Ms. Kardashian was accused of failing to disclose the amount of her $250,000 payment for promoting EMAX tokens on her Instagram account. The post in question was tagged "#AD" but Ms. Kardashian should have disclosed how much she was paid and from whom, the SEC said.

Some experts say that if it sells consumer goods, then the Federal Trade Commission, which usually deals with cases related to agents and their support, would be enough to label it "advertising."

The SEC maintains a different standard for those promoting anything it deems to be a security. The "anti-publicity" provision has been a part of securities law for decades and is intended to help investors know when there is a conflict of interest that could influence a person's recommendation to buy or sell a security.

The crypto boom has attracted many investors, including less experienced ones, which raises the question of the feasibility of trading this type of asset.

David Klein, managing partner of marketing law firm Klein Moynihan Turco LLP, says many highly publicized initial coin offerings have failed, including other ventures that have resulted in consumers losing their investments. "The SEC has a mandate to step in and make sure things like this don't happen again" without regulatory repercussions, he said.

Here's what marketers need to know about the SEC's latest move and what it means for stakeholders.

How can brands and influencers stay on top?

When it comes to cryptocurrencies, brands and the influencers they work with need to be careful and make it clear when they're rewarding influencers for their endorsements, monetarily or otherwise, said Latiza Tiffit, executive vice president of policy. Management of the Interactive Advertising, Digital Media and Marketing Trade Association.

"Better to play it safe," he said. "Even if you think you're in a gray area, so to speak, you have to be clear."

Mr. Klein said social media influencers and businesses should seek legal advice early in their marketing planning to ensure compliance with all applicable regulations.

“Just because something happens on social media doesn't mean the old zoning rules don't apply. They do," he said.

Why is the SEC doing this?

The Securities and Exchange Commission can step in when promotions are linked to promotions where consumers can get much higher rates than traditional advertising.

"The risk to the average consumer is much greater than buying a dress or a celebrity-endorsed diet product online," says Farah Sunderjee, a partner at law firm Dorsey & Whitney LLP. "It is known that you can lose a lot of money on the purchase of any product. But these are much more protected and sensitive areas where we want to make sure people know what they're doing."

In its notice of settlement, the SEC said securities promotions must meet certain conditions.

"Federal securities laws make it clear that a celebrity or other person promoting a cryptocurrency security must disclose the nature, source, and amount of compensation received in exchange for the promotion," said SEC Director Gurbir Grewal. -application department, the message says. . .

When is safety important?

The SEC warns that virtual tokens or coins sold in initial coin offerings may constitute securities and that anyone offering and selling securities in the United States must comply with federal securities laws.

Christopher Herald, a crypto partner at the law firm Lowenstein Sandler LLP, said the SEC uses a special test to see what falls under that definition. Mr. Herold led the New Jersey Securities and Exchange Commission in 2018 when it took action against crypto assets claimed by actor Steven Seagal, in part because payments to Mr. Seagal were not disclosed.

Determining whether digital assets are securities involves deciding whether something constitutes an investment contract. It passes the test of investing money in a joint venture with a reasonable expectation of profit from the efforts of others.

But the topic was controversial.

"Over time, especially in the crypto space, we've seen [people] trying to call themselves different names to get around security laws," Gerald said.

He added that some in the cryptocurrency industry say that Bitcoin and some stablecoins are commodities. Federal agencies and congressional committees disagree on which regulator should oversee cryptocurrencies, defining them as different products or securities.

“There is still a lot of controversy about this: what is security? What is a commodity? Anything else?" said Mr. Herrold.

Super Bowl ad stars spotted?

Cryptocurrency companies like FTX and Crypto.com have tapped celebrities from Larry David to LeBron James to promote their companies in commercials, including one that aired during this year's Super Bowl.

Appearing in a TV ad doesn't mean those messages are any more protected than a short social media post. Mr. Gerald said it might depend on what the stars say in that ad. When they make more general statements about platforms, that's considered different from stock-specific investment advice.

"You have serious problems when you promote a broadcaster," he said.

Email Megan Graham at megan.graham@wsj.com

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