On October 3, 2022, the Securities and Exchange Commission (SEC) announced that it had reached a $1.26 million settlement with Kim Kardashian over her social media promotion of the EMAX token without disclosing the payment she made. received from the token issuer, EthereumMax. The question provides important lessons for advertisers. Here’s a summary of what happened to Ms. Kardashian and what brands and those working on their behalf need to know.
Ms. Kardashian promoted EthereumMax’s EMAX token in a 2021 Instagram post to her 225 million followers:
EthereumMax reportedly paid Ms. Kardashian $250,000 for the position.
Legal actions against Kim Kardashian.
First, a class of EMAX buyers took on Ms. Kardashian in a class action – sued in California federal court – alleging aiding and abetting, violating California’s unfair competition law and the Consumers Legal Remedies Act, among other claims, and seeking damages and injunctive relief. This case is ongoing.
Now, the SEC is alleging that Kardashian’s promotion violated Section 17(b) — the so-called “anti-soliciting provision” — of the federal Securities Act of 1933. The SEC’s order (that you can read here) explains that it is illegal for any person to publish, advertise or broadcast an advertisement, among other communications, describing a security for consideration received or to be received, without fully disclosing the receipt and amount of the consideration .
In the highly uncertain legal environment surrounding cryptocurrency and other digital assets, much attention is paid to the words and actions of US regulators, particularly the SEC. The SEC’s position in this action was that the EMAX token constituted “security” – an investment contract – for purposes of federal securities laws. Why? S-shapedEC vs. WJ Howey Co., 328 U.S. 293, 289-99 (1946), the Supreme Court set out the elements for determining whether a particular scheme constitutes an “investment contract” within the meaning of the Securities Act, directing courts to consider whether it exists: (1) an investment of money; (2) in a joint venture; (3) with the expectation of profits only from the efforts of others.
More recently, the SEC issued a frame (“Frame”) for the way the Howey investment contract analysis applies to digital assets. According to the Framework, digital assets are investment contracts when (i) the digital asset is purchased or otherwise acquired in exchange for value, whether in the form of real or fiat currency, a digital asset or other counterparty; (ii) there is an investment in a joint operation; and (iii) there is a reasonable expectation of profit from the efforts of others (which often happens with digital assets when the value of the asset is tied to the success of a promoter’s efforts).
In the Kardashian case, the SEC asserts that EMAX tokens constitute securities. As their order noted: “Based on EthereumMax marketing materials, as well as public statements from EthereumMax affiliates, the EthereumMax website, and EthereumMax social media handles, token buyers EMAX reportedly had a reasonable expectation of profits from their token investment,” and that EthereumMax promised to develop certain “token improvements,” including “. . . future rewards and staking programs, national sports and event partnerships, and general expansion of the EMAX token ecosystem.
Take away food.
Here are some key takeaways for brands and agencies:
- The SEC aggressively reviews and enforces digital assets that it deems securities. The SEC’s action here is another stark example of the SEC’s “regulation by enforcement.” Like Caroline Pham, Commissioner of the Commodity Futures Trading Commission Noted in a recent public statement: “Instead of crafting bespoke rules in an inclusive and transparent manner, the SEC relies on these kinds of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even assets that are not securities.” Those looking to promote crypto projects to consumers, to develop tokens for brands or celebritiesor hire or act as endorsers in the crypto space – should now consider whether SEC rules may apply to their projects.
- #AD may not be enough when it comes to titles. When promoting digital assets, compliance with the Federal Trade Commission’s material connection disclosure rules may be necessary but not sufficient. Here, Kardashian’s post included the disclosure of the #ad hardware connection, but that disclosure was no defense and the SEC still acted against it. Other regulators (including the SEC), as well as private plaintiffs, may also have their skin in the game. As is clear from the SEC’s settlement with Kardashian, to the extent the underlying asset is considered like a title, the receipt and amount of consideration must also be disclosed.
Legal concerns related to digital asset projects will need to be assessed on a case-by-case basis. If you have any questions, please contact Hannah Taylor at 212 705-4849 or [email protected] or any other member of the Frankfurt Kurnit Blockchain Technology Group.
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