Initial coin disclosure fines have been warning shots to prove the regulator is serious. Now it’s time to see if bigger targets realize they’re selling investments, not soap.
The SEC has a special grudge against famous people who use their social media reach to promote crypto currencies the way they’d endorse coffee or sportswear.
Celebrities were explicitly warned last year that the regulator is watching. Now the first charges have been brought and the stars have settled.
And with big names like Gwyneth Paltrow, Paris Hilton and William Shatner on record boosting the crypto creed, odds are extremely good that we’ll see higher-profile busts in the new year.
Mayweather tapped out
Boxer Floyd Mayweather just paid a $300,000 fine as well as giving up all of the $300,000 crypto backers paid him to advertise their products.
He was one of the more strident big names to suddenly get behind digital investing in 2017, taking “Crypto” as his public middle name and bragging about how much money he’d make on specific offerings.
Now he can’t talk about them at all. While the settlement avoids discussing blame, he’s barred from promoting any securities whatsoever for the next three years.
The SEC isn’t weighing in on whether the offerings Mayweather plugged online or the asset class as a whole are good or suitable investments. Neither are we.
As always, that’s a question that will simply need history to answer it for us. Some great blockchain ideas will fail their investors. Others will reward people with the right timing.
Either way, what the SEC has protested against here boils down to Mayweather’s failure to disclose that he’d been paid.
If he’d admitted somewhere on his Instagram account that the deal promoters had given him $100,000 per token, he probably could’ve kept on banging the crypto table indefinitely.
Even fraud and unlicensed securities sales are nebulous enforcement topics here. Someone could claim ignorance to a crypto vehicle’s untested flaws or blur the line between marketing and the active sales funnel.
But tripping the SEC’s one clear rule on the asset class tripped him up. If you’ve been paid, you have to tell people exactly how the relationship works.
Otherwise, your apparently “sincere” enthusiasm looks just like touting. Mayweather crossed that line when he took the money and didn’t mention it.
Reading between the lines, what infuriates the regulators here is that a lot of celebrities already bend the truth for a living. They’re professional actors.
And because they’ve specialized elsewhere, they rarely know how to evaluate investments on their intrinsic merits.
Arguably there are no experts on the emerging crypto world, but performers are probably no better informed than the rest of us right now.
Mayweather is as far as it gets from a professional liar, but he knows how social media work and how to leverage his reach. That’s all it takes to get the word out, but falls short of actually matching his fans to the right products.
Either way, if he wanted to make this into an ongoing side venture, he needed to at least link every paid post through a disclosure page.
The SEC simultaneously took another Instagram record producer out of the pool for touting two tokens, at least one of which happened to be a Mayweather favorite that went down in April for fraud.
This was no random enforcement action. Regulators already busted the people who created this $32 million “crypto wallet” for making verifiably false claims about their relationships with the credit card networks.
No relationships, no valid investment thesis. And while the stars can claim ignorance, the disclosure failure still means the SEC can make an example of them in the process.
A long way from selling snake oil
It should create a chill. Crypto can be a wild and woolly world as anyone who’s had to do due diligence on a blockchain stock knows well.
But as long as these tokens are marketed as investments, the regulators will keep a closer eye on the crypto tweets and posts than they do on the usual flood of “sponsored messages.”
Big social media accounts regularly mix paid product placement with sincere consumer enthusiasm. When it’s done well, you can’t tell if Gwyneth Paltrow, for example, really likes the yogurt or not.
It’s not new. Make health or medical claims for that yogurt, you’ll reach the attention of the health and medical regulators, whose rules are relatively fuzzy.
In the investment world, though, best practice is clear. Don’t lie. Don’t sell anything that requires a license. Disclose clear conflicts of interest.
Err on the side of too much information. If you haven’t been paid to talk about a particular investment product, say that too.
Paltrow rarely if ever draws a firm line between yogurt makers who’ve paid her and those she actually likes. That’s okay in the rough-and-tumble yogurt industry. It’s not smart when the SEC gets involved.
And since there are rumors that Paltrow’s endorsement of another crypto wallet was compensated and not simply motivated by her own “wow” factor, the SEC is probably already involved.
The standard disclaimer on her site protects her from product claims and especially medical liability. The fine print explains that she and her staff are not doctors.
It’s silent on whether they’re investment analysts. That’s a problem now that she’s suddenly started hosting crypto tutorials.
But we’ll let that one unfold at its own pace. Other crypto-loving celebrities have taken more measured approaches to sharing their interest in the asset class.
Most are simply happy to gush about how much they love the bitcoin. As long as they disclose conflicts like TV stock pickers, that’s probably OK.
In general mixing paid and free messaging raises the risk that the lines will cross and the SEC will have questions.
If you have a financial interest in the instrument, say so. Otherwise, say that too.
Interestingly, Mayweather is continuing to cooperate with the SEC’s investigation of crypto promotion practices, which to me indicates that this is far from over.
The regulators want to roll up the network. We could see people like Paris Hilton pay a fine or proactively clam up on their favorite tokens.
As Hilton noted at the time, her interest was #notanad and so theoretically uncompensated. Whether that’s good enough for the SEC remains to be seen.
It’s also an open question whether William Shatner will keep pitching solar power for bitcoin miners. While the actual investment is in the project development company, his job requires him to get close to the crypto community.
As every advisor knows, every apparently innocent “thumbs up” he gives crypto on his social media accounts qualifies as an implicit endorsement.
He’s not getting paid to tout bitcoin. But the solar company gave him stock options to tout their services to potential customers, including the bitcoin miners.
Ironically enough those options are deep underwater now. We know this because people were careful enough to disclose the financial terms of the relationship up front.
Maybe that’s because the company is Canadian and watches its step on cross-border transactions. Maybe Shatner’s lawyers have simply been around the block a few times.
But at one point this summer, those options were worth $11,000. When you’re a world-class pitchman, that’s not worth getting your wrist slapped.
And that’s true throughout the crypto world. Those who took cash need to say that.
Those who got sweetheart status on owning the tokens themselves need to reveal their cost basis and extent of their holdings.
In the latter case, at least the interests are aligned.
