The Securities and Exchange Commission (SEC) dropped its latest ruling after announcing charges against Hollywood icon Kim Kardashian on Monday, October 3, for violating the anti-touting provision of federal securities law that involved a 2021 social media post promoting a crypto asset – EthereumMax (EMAX).

Kardashian, according to the SEC press release, agreed to settle the charges and pay $1.26 million USD in penalties, disgorgement, and interest – cooperating with the SEC’s ongoing investigation. 

The heart of the SEC’s investigation is Kardashian’s June 13, 2021 Instagram post promoting a crypto asset security offered and sold by EMAX, where she named the token without disclosing the amount she was paid for its promotion. 

In the post, Kardashian wrote, “Are you guys into crypto? This is not financial advice but sharing what my friends told me about the ethereum max token!”

Source: Twitter

While she stated that the post was “not financial advice” and added different hashtags, including “#ad,” the SEC said that this wasn’t sufficient for staying within the parameters of federal securities law. 

Do Not Forget Section 17(b) of the Securities Act

If you are reading this article, you are deep enough in the digital asset space where you should be familiar with Section 17(b) of the Securities Act of 1933 – or, the anti-touting provision central to Kardashian’s case, along with others the SEC has previously held accountable. 

Under Section 17(b), a “promoter” is prohibited from publishing or circulating an article or communication for ‘a consideration received’ without fully disclosing that consideration. Under the law, a “consideration” is a mutual exchange of value that helps solidify the enforcement of a legal contract or agreement. 

The anti-touting provisions of Section 17(b), however, only apply if the instrument being touted is a “security” – in this case, EthereumMax. 

SEC’s 2021 ruling against Coinschedule.com

The SEC’s legal precedent of holding individuals and/or entities accountable to the provisions laid out in Section 17(b) with respect to crypto assets is best seen in the landmark 2021 case of Blotics Ltd. (f/d/b/a Coinschedule.com). 

In July 2021, the SEC settled charges against a UK-based operator of Coinschedule.com, a once-popular website that profiled offerings of digital asset securities, after finding that Blotics Ltd. violated the anti-touting provisions of Section 17(b) by failing to disclose the compensation it received from issuers of the digital securities it profiled on its website. 

Consequently, Blotics Lts. was ordered to pay disgorgement of $43,000 USD, plus interest, and a civil penalty of $154,434 USD.

Similar to Blotics Ltd., Kardashian also failed to specifically disclose to her then 225 million Instagram followers that she was being paid $250,000 USD to curate and distribute the July 2021 EthereumMax promotional post – assessing approximately $250,000 USD in disgorgement (the promotional payment she received plus prejudgment interest), and a $1,000 USD penalty. 

The regulator’s recent announcement also stated that Kardashian agreed that she would not promote any crypto asset securities for the next three years. 

What This Means Moving Forward

At the end of the day, if you’re actively engaged in the cryptocurrency and/or NFT space, it’s worth paying attention to the following takeaways:

1. Using the “#ad” hashtag alone isn’t enough to protect you from potential liability

Perhaps, the biggest takeaway from the SEC’s charges against Kardashian, is that simply using the “#ad” hashtag at the end of a social media post that promotes and/or touts a particular crypto asset security – is not enough to shield you from potential scrutiny and liability. 

Unfortunately, this is prevalent amongst social media influencers throughout the Web3 community.

Any promotion, according to Section 17(b), which includes a (1) communication, including a social media post that is (2) published and (3) distributed to others, is subject to Section 17(b) of the Securities Act of 1933. 

The Act’s anti-touting provisions requires more than a simple disclaimer, informing the public (and potential investors) that there was some form of value or consideration provided to that individual for promoting that particular crypto asset security, in addition to other details associated with that consideration received.

2. Section 17(b) isn’t the entire analysis here

While Section 17(b) and its accompanying legal precedent does a fairly decent job at outlining the mechanics for how an investor/promoter should go about promoting, supporting, or otherwise touting a particular crypto asset security – it’s not the entire analysis.

That analysis for determining whether a particular instrument is considered to be a “security,” is still governed by the Howey Test, established in the 1946 landmark decision of SEC v. W.J. Howey Co., 328 U.S. 293.

3. “Influencers” are not exempt from SEC requirements

An individual’s status certainly does not exempt he/she/them from the regulatory requirements of promoting securities, but rather, adds an extra emphasis in cases involving a public figure or today’ everyday “influencer” or high-end content creator.

“This case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors,” said SEC Chair Gary Gensler. “We encourage investors to consider an investment’s potential risks and opportunities in light of their own financial goals.”

In August, a CNBC report revealed the lengths in which many social media “influencers” go to in promoting or shilling crypto-based projects with little to no value, earning anywhere from $30,000 USD to $100,000 USD per post.

The irony, however, with many of these partnerships, is that we are seeing highly acclaimed talent across today’s media landscape capitalize on a nascent technology that we, including our regulators, don’t fully understand — yet, people are willing to place their trust into these individuals and invest.

Kardashian, however, isn’t the only Hollywood celebrity to face scrutiny surrounding crypto asset promotion. 

Over the past two years, other celebrities, including, but not limited to Reese Witherspoon, Gwyneth Paltrow, Paris Hilton, Floyd Mayweather, Paul Pierce, Matt Damon, Jamie Foxx, and Tom Brady have all promoted some form of cryptocurrency and/or crypto-based platform that has led to questions surrounding the transparency and/or underlying understanding of what exactly they are promoting to their social media following. 

Kardashian, Mayweather, and Pierce were sued earlier this year for their promotions of EthereumMax, where investors alleged that the celebrities colluded with EMAX co-founders Steve Gentile and Giovanni Perone to “pump and dump” the price of the token to lure prospective buyers in and, essentially, leave the holders with a bunch of worthless coins.

“The federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Investors are entitled to know whether the publicity of a security is unbiased, and Ms. Kardashian failed to disclose this information.”

4. The industry isn’t entirely pleased with the SEC’s progress

Truthfully, the crypto industry isn’t entirely pleased with the progress the SEC has made in helping to provide further clarity on how investors can safely participate in the space without inadvertently subjecting themselves to legal and regulatory liability. 

While the regulation is clear on how digital assets are to be governed, the biggest issue the industry faces right now is the means of actually applying the regulation in a way that is commonly understood by investors and active participants. 

Earlier this week, U.S. senators Marsha Blackburn (R-TN) and Cynthia Lummis (R-WY) shared additional information with TechCrunch about the reformed bill – the Cryptocurrency Cybersecurity Information Sharing Act, which would amend the Cybersecurity Information Sharing Act of 2015 to include cryptocurrency firms. 

The bill, according to TechCrunch, is endorsed by the Electronic Transactions Association. In June, Sen. Lummis first proposed the 69-page bipartisan crypto bill, alongside Sen. Kirsten Gillibrand (D-NY), hoping to provide a more in-depth guide around the digital asset sector. 

In September, The White House released its first framework on managing digital assets in the U.S., which involves the active participation by several federal agencies to develop recommendations and reports on the crypto market. The framework quickly followed an executive order issued by President Joe Biden in March, outlining a national strategy for more oversight of the crypto industry. 

The issue surrounding who should be regulating crypto entities, however, is still divided – should the SEC or its smaller sister agency, the Commodities Futures Trading Commission (CFTC) take the reins? 

To date, both agencies have asserted jurisdiction without actually issuing any official guidance about where those lines are drawn. Consequently, SEC Chairman Gary Gensler’s controversial “enforcement-first” approach has continued to stringently (and unfairly) hold companies accountable, suing them for failure to comply with securities laws.

Gensler also posted a video to Twitter on Monday, reminding Crypto Twitter that just because celebrities promote certain investments, doesn’t mean they necessarily align with you as an investor.

Today @SECGov, we charged Kim Kardashian for unlawfully touting a crypto security.

This case is a reminder that, when celebrities / influencers endorse investment opps, including crypto asset securities, it doesn’t mean those investment products are right for all investors.

— Gary Gensler (@GaryGensler) October 3, 2022

In other crypto regulation news, the FBI issues an alert over DeFi platforms.