Keeping Up With the Commission

Earlier this month, Kim Kardashian was charged by the Securities and Exchange Commission (“SEC”) for violating anti-touting norms by publishing an Instagram post about EMAX tokens, which were “crypto asset securit[ies]” offered by EthereumMax. Kardashian was paid $250,000 to promote the tokens, a fact that she did not disclose on her Instagram post or otherwise to her followers, and she paid $1.26 million to settle the charges with the SEC.

The SEC’s order is not particularly surprising. Since 2017, the SEC has been vocal about their intention to regulate tokens and other crypto assets just as they regulate traditional securities. The SEC has stated plainly that securities registration requirements apply whether “the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology”. They have also been vocal about their belief that certain crypto tokens are securities and should be regulated accordingly. As the country’s primary enforcer of securities laws, the SEC frequently discusses to what extent it will share oversight authority with with the country’s regular of commodities, the Commodity Futures Trading Commission, but not really whether cryptos should be regulated.

What is interesting is how the SEC has treated celebrity advertisements of crypto tokens. Before Kardashian, the SEC settled charges against Floyd Mayweather Jr., DJ Khaled, and Steven Seagal for unlawfully touting coin offerings. Like Kardashian, these celebrities also settled the charges without admitting or denying the SEC’s findings. The SEC’s anti-touting rules (Section 17(b) of the Securities Act of 1933 (“1933 Act”)) prevent any person from publishing or giving publicity to any communication that describes security without fully disclosing whether any consideration had been or would be received for such publicity and the amount of such consideration. In each case, these celebrities published information about the crypto tokens and did not disclose the consideration they received. The fact that each of them has millions of followers on Instagram also makes for a good argument for investor protection. However, while they may appear as clear cases of SEC anti-touting rule violations, the classification of the assets makes this characterization uncertain. Whether or not there exist such violations of the SEC anti-touting rule rests on the uncontested premise that these crypto tokens are securities.

If they are securities, then celebrities such as Kardashian who post about crypto tokens on their social media may be liable for violating other SEC norms as well. Indeed, the SEC itself issued a warning that promoting crypto tokens might lead to a violation of the SEC’s anti-scalping provisions (as found under Section 17(a) of the 1933 Act) or its anti-fraud provisions (as found under Section 10(b) of the Securities Exchange Act of 1934 (“1934 Act”)). In addition, participating in advertisements for the sale of crypto tokens might also make an individual liable for registration as a broker under Section 15(a) of the 1934 Act. The 1934 Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” Kardashian’s post, for example, had a “swipe-up” link to the website where one could purchase the tokens. There might be scope for an argument that she was acting as a broker or another kind of intermediary that is regulated by the SEC without being registered as one. It is not uncommon for the SEC to pursue these various courses of action in similar scenarios involving equities. They have also filed charges against crypto companies and their managers for violating various provisions of the 1934 and 1933 Acts.

Perhaps the best explanation for these anti-touting enforcement actions is that the SEC is using them as signaling devices. SEC investigations are expensive and time-consuming. Charging celebrities for anti-touting is more straightforward than pursuing other enforcement actions. Fining Kim Kardashian is important for the same reason that EthereumMax found it important to have her advertise the tokens. Kim Kardashian is one of the most followed celebrities on social media. Her posts have reach and so does any news about her. The other celebrities who have previously been fined, are popular, but not Kardashian popular. When something happens to a Kardashian, everyone notices, and everyone cares. The SEC, over the years, has attempted other methods of issuing warnings related to crypto, including releasing investor alerts on celebrity endorsements. Chairman Gensler has even put out a video on YouTube. But the SEC’s page only has about 10,000 subscribers and the video has just 14,000 views. Kim has 1.96 million subscribers on YouTube and 332 million followers on Instagram. Fining her for touting makes it very clear to the crypto industry, celebrities, investors, and maybe even Capitol Hill – the SEC is willing to regulate crypto assets just as they do with traditional securities.

Soumya is an LL.M. candidate at NYU Law. Prior to this, she was a capital markets lawyer in India for five years and worked with two of India’s leading law firms. At NYU, she is a Graduate Editor of the Journal of Law & Business and serves on the board of the Law & Business Association.