Kim Kardashian’s Ethereum Max ad violated the SEC’s anti-touting provision

Kim Kardashian disclosed that she was paid for promoting Ethereum Max — but didn’t tell her followers the exact amount. The SEC did the right thing when it fined her for that oversight.

In June 2021, Kim Kardashian published an Instagram story informing her approximately 330 million Instagram followers about the EthereumMax (EMAX) crypto token. The Securities and Exchange Commission (SEC) charged Kardashian, claiming she violated the anti-touting provision of the Securities Act when she failed to disclose she received $250,000 in exchange for her promotion of the unregistered security.

The charges incited a public debate — is the requirement to disclose the amount paid to promote an investment opportunity important?

What’s new? Celebrities and social media influencers have long enjoyed a lucrative revenue stream in promoting and endorsing services and products ranging from clothing to beauty products, and even supplements and medications. The Federal Trade Commission (FTC) regulates endorsements by requiring various acts and disclosures, including whether a financial relationship exists between the endorser and the company, whether a post was paid for and even by requiring an endorser to personally try a product before endorsing it. Still, the FTC does not go so far as to require endorsers to disclose the amount they were paid to promote a product.

Related: The SEC is bullying Kim Kardashian, and it could chill the influencer economy

So, what’s different here? This time, the “product” is an investment opportunity falling under the watchful eye of the SEC. As is required by the FTC’s Endorsement and Testimonial Guidelines, Kardashian made sure to include disclaimers such as “#Ad” and even “this is not financial advice,” but that’s not sufficient under the SEC’s regulations, which also required Kardashian to disclose that she was paid $250,000 by EthereumMax to “tout” the token.

The SEC’s charges in response to Kardashian’s seemingly compliant post revealed what appears to be the beginning of the federal agencies’ heightened regulation and required transparency in connection with endorsements, specifically of highly speculative assets. The charges also beg the question – just how much transparency is important?

Some will argue that Kardashian’s “#Ad” and “this is not financial advice” disclosures — which would suffice under the FTC’s requirements — are enough to place her followers on notice that she is a biased, interested promoter of EthereumMax, and that the SEC’s anti-touting provision’s requirement to disclose the exact amount of consideration is senseless. In other words, merely disclosing that she was paid $250,000 to promote the token would not have made a material difference to her followers in their decision to invest.

However, whether or not a particular disclosure is material to a potential investor is a question best answered by the investor in question. The SEC’s existence is predicated on protecting the investing public. To do so, potential investors should receive as much information as possible to assist them in their decision-making.

Price of Ethereum Max from November 2021-October 2022. Source: CoinGecko

Although the difference between celebrities receiving $100,000 versus $200,000 for a social media post may not appear material to investors, a $1,000,000 check may alter potential investors’ perception about a celebrity’s inclination to make statements that conflict with or disregard their true beliefs, experience or even lack of knowledge. This tipping point in judgment may differ from investor to investor; therefore, such information should be disclosed and freely evaluated by the investing public.

The trend toward broader disclosure is prevalent. The FTC recently proposed an amendment to its Endorsement Guidelines on Digital Advertising to address the growing influencer market. Of relevance is Section 255.5, “Disclosure of Material Connections,” which proposes the clear and conspicuous disclosure of material connections that may materially affect the weight or credibility of the endorsement, including “business, family, or personal relationships; monetary payments; the provision of free or discounted products or services to the endorser; early access to the product; or the possibility of winning a prize, of being paid, or of appearing on television or in other media promotions.”

Related: Federal regulators are preparing to pass judgment on Ethereum

With such disclosures, the appeal of investing in the same companies as their favorite celebrities and influencers might be lost if fans realized the only connection between a celebrity and a promoted product was a hefty check. On the other hand, if followers are aware of a “material connection” between a celebrity and an endorsed product, they may be even more inclined to invest. Regardless, the argument remains — the more information disclosed to the investing public, the more educated their decision-making can be.

SEC Chairman Gary Gensler wasted no time making media appearances to echo the same, warning the general public that celebrities’ incentives aren’t typically aligned with consumers’ best interests. In the SEC’s press release, Gensler emphasized that celebrities and influencers must be mindful that the law requires them to make heightened disclosures to protect individuals who may rely on them for “financial advice.”

Celebrities wield significant influence on their fan bases. Many who endorse investment opportunities do not have sufficient expertise to ensure that the investment is appropriate and complies with U.S. securities laws. As a result, celebrities such as Kardashian have the power to influence millions of individuals to make uninformed decisions solely based on their admiration, trust and loyalty.

Kardashian’s $1.6 million settlement is a reminder that the SEC has an exceptionally high interest in regulating highly speculative asset classes like crypto tokens and will continue to press charges against those with a great deal of influence for unlawfully touting crypto securities. The investing public should beware and always conduct their independent due diligence. The SEC should continue to require broad disclosures from endorsers to allow for and support such due diligence.

Gai Sher is senior counsel in the innovation and technology practice group and the corporate & business and entertainment & sports practice groups at Greenspoon Marder LLP. Originally from Israel, she attended Syracuse University for her undergraduate degrees before obtaining a Juris Doctor from Northeastern University’s School of Law. Ariela Benchlouch is a law clerk in Greenspoon Marder's innovation & technology practice group. With a background and passion for entertainment law, music, fashion, media, and blockchain technology, she previously held legal intern roles at LAA Sports & Entertainment and PlayOne NFT.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.