On November 1, 2017, the U.S. Securities and Exchange Commission (SEC) joined the U.S. Federal Trade Commission (FTC) in warning celebrities about social media endorsements.
The SEC issued both a public statement and an investor alert regarding celebrity endorsements of Initial Coin Offerings (ICOs). We published a blog post in August regarding the SEC’s investigative report that stated that US securities laws apply to sales of securities in the United States purchased with virtual currencies or distributed with blockchain technology.
The SEC’s public statement focused on warning celebrities and others who promote virtual coins or tokens: “Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope and amount of compensation received in exchange for the promotion.” The SEC also made clear that making such endorsements can create several risks for the celebrity, including possibly running afoul of the federal securities law’s anti-touting and anti-fraud provisions if determined to have been participating in an unregistered offer and sale of securities or acting as an unregistered broker.
In contrast, the SEC’s investor alert focused on investors and warned “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.” The SEC continued:
Celebrities, like anyone else, can be lured into participating (even unknowingly) in a fraudulent scheme. Also, celebrities are sometimes linked to products or services without their consent so the celebrity may not even have endorsed the investment.
The SEC cautions investors to do their homework before investing by checking out the background of a person who is recommending or selling an investment; learning about the finances, organizational structure and business prospects of any company in which an investor wants to invest; and analyzing a potential investment’s risks and benefits in light of the investor’s own investment risk profile.
The FTC & Celebrity Endorsements
Previously in 2017, the FTC issued some warning letters and also took some regulatory action against celebrity endorsers. In the spring, the FTC had issued advisory letters to approximately 45 companies and 45 celebrities regarding certain images that appeared on Instagram.
The FTC’s Endorsement Guides simply require a disclosure of a “material connection”: a connection that might affect the weight or credibility that consumers give the endorsement.
The FTC offered the following guidance in the context of social media and celebrity endorsements:
- On image-only social media platforms, “superimpose disclosures over the images”
- “Don’t assume disclosures built into social media platforms are sufficient”
- The following terms and hashtags are ambiguous and should not be considered adequate: “Thanks” #collab #sp #spon #ambassador
- “Don’t rely on disclosures that people will see only if they click ‘more’”
- Tagging a brand is an endorsement of the brand
- “A disclosure on a profile page isn’t sufficient because many people in your audience probably won’t see it”
- “Advertisers shouldn’t encourage endorsements using [social media] features that don’t allow for clear and conspicuous disclosures”
- “A single disclosure on your home page” is not sufficient
- A hyperlink labeled “Disclosure” or “Legal” in a post “isn’t likely to be sufficient. It does not convey the importance, nature, and relevance of the information to which it leads. . .”
- Don’t simply append “ad” to the end of a hashtag with your company name because there is “a good chance that consumers won’t notice and understand the significance of the word ‘ad’ at the end of a hashtag”
The FTC’s Endorsement Guides simply require a disclosure of a “material connection” between the endorser and the company/product. In contrast, with respect to ICOs and cryptocurrency, the SEC mandates disclosure of the “nature, scope, and amount of compensation” relating to the endorsement.
Violations of the FTC’s Endorsement Guides can lead to a civil action by the FTC for violation of Section 5 of the FTC Act. These actions typically result in consent agreements where the defendants agree to certain junctive measures and ongoing audit measures for 10 or 20 years.
Unlike the FTC, the SEC has both civil and criminal authority. Consequently, on the same day as the SEC’s public statement, some celebrities deleted social media posts endorsing or promoting coin offerings.
Companies that wish to engage “influencers” or celebrities for promotion purposes should incorporate compliance with federal (FTC and SEC) requirements into their contracts, but also should monitor the behavior of the “influencers” relating to the company’s offerings.