Promoter Liability in SEC Investigations: A Growing Concern for Celebrities and Other Endorsers
Endorsements are big business opportunities for celebrities, athletes, and online influencers. With global stars like Christiano Ronaldo reportedly receiving as much as $2.4 million for a single post, these highly lucrative deals are attractive not only due to the financial windfall they provide, but also due to the minimal amount of work involved.
But, while online promotions are extremely profitable, they are also dangerous. This is especially true when they involve securities, cryptocurrencies, and other investments. These promotions are regulated by the U.S. Securities and Exchange Commission (SEC).Promotions involving illegal or fraudulent investments can subject celebrities and others to both civil and criminal liability.
Understanding the SEC’s Promoter Rules
To understand when celebrities and others can face civil or criminal liability, we first need to look at the SEC’s definition of a promoter. Under 17 C.F.R. Section 240.12b-2, a “promoter” is defined as:
“(i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or
(ii) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.”
An ”issuer” is a corporation or other entity that offers securities to the public for investment. Thus, under Section 240.12b-2, individuals who “take initiative” in founding or organizing a securities offering or who receive 10 percent or more of a company’s securities (or 10 percent or more of the proceeds from the sale of a company’s securities) qualify as a promoter.
However, an individual does not have to be a “promoter” under Section 240.12b-2 to face liability for endorsing a cryptocurrency or securities offering. While this regulatory definition identifies a subset of individuals who can face liability for illegally promoting securities offerings, other individuals who promote investment opportunities—in the colloquial sense—can face liability as well. This includes encouraging, endorsing, touting, disseminating, or other similar conduct.
Anyone who promotes a cryptocurrency or securities offering has a legal duty to ensure that the information they publish is complete, accurate, and not misleading. This obligation exists under the federal securities laws as well as other sources of federal authority such as the Federal Trade Commission’s Endorsement Guidelines. In some cases, federal criminal statutes, such as the federal wire fraud statute, can come into play. Thus, even if a celebrity or other endorser does not play an active role in the promoted business and does not receive 10 percent or more of the financial benefits of the promoted offering, the celebrity or endorser can still face liability. Depending on the nature of the promotion and other pertinent factors, this may include liability for:
- Failure to adequately disclose that the promotion is a paid advertisement;
- Failure to adequately disclose the compensation received for the promotion; and/or
- Publishing incomplete or misleading information about the security, cryptocurrency, or other investment opportunity.
Examples of Recent SEC and DOJ Cases Targeting Promoters
To illustrate the breadth of the SEC’s enforcement authority, let’s examine some examples of recent cases targeting promoters. In many cases, the SEC’s civil enforcement efforts can also lead to criminal prosecution by the U.S. Department of Justice (DOJ):
1. California Resident Sentenced to 5 Years in Prison for Celebrity Cryptocurrency Promotion Scheme
In January 2023, the DOJ announced that a 58-year-old California man had been sentenced to 5 years in federal prison for his participation in a “cryptocurrency and securities fraud scheme.” He was also ordered to pay approximately $3.5 million in forfeiture. According to the DOJ, the defendant was charged with being “a promoter of several digital asset-related companies, conspire[ing] with others to defraud investor victims by inducing them to invest in their companies.” More specifically, the DOJ alleged that:
- The defendant “falsely claimed that investor funds would be invested in digital asset mining and trading platforms that would earn them massive profits.”
- The defendant used a professional athlete’s name and likeness to purportedly endorse the offering without the athlete’s consent.
- The defendant paid “various promoters, including an actor famous for martial arts films made in the 1980s and 1990s, to serve as a promoter and celebrity spokesperson, falsely claiming that [the investment] could generate an ‘8,000%” return for investors within one year, and that he was a participant in the ICO.’”
- The defendant created false press releases and whitepapers promoting the investment opportunity.
2. Multiple Celebrities Face Charges in TRX and BitTorrent Promotion Fraud Enforcement Action
In March 2023, the SEC announced charges against multiple celebrities who were accused of participating in a fraudulent scheme to promote TRX and BitTorrent crypto asset securities. The SEC also charged the companies’ founder in the enforcement action, alleging that he “fraudulently manipulat[ed] the secondary market for TRX through extensive wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership, and . . . orchestrating a scheme to pay celebrities to tout TRX and [BitTorrent] without disclosing their compensation.”
The SEC alleges that the following celebrities violated federal law by “illegally touting TRX and/or [BitTorrent] without disclosing that they were compensated for doing so and the amount of their compensation”:
- Lindsay Lohan
- Jake Paul
- DeAndre Cortez Way (Soulja Boy)
- Austin Mahone
- Michele Mason (Kendra Lust)
- Miles Parks McCollum (Lil Yachty)
- Shaffer Smith (Ne-Yo)
- Aliaune Thiam (Akon)
3. Kim Kardashian Settles Charges for “Unlawfully Touting Crypto Security”
In October 2022, the SEC entered into a settlement with Kim Kardashian following an investigation into her online promotion of EMAX tokens. According to the SEC, Kardashian failed to disclose the payment she received when promoting the crypto asset security on social media and agreed to pay $1.26 million in penalties, disgorgement, and interest. The SEC’s press release states, “Kardashian failed to disclose that she was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax,” and that the case “serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities.”
Civil vs. Criminal Liability in SEC and DOJ Promotion Scheme Investigations
Whereas the first case discussed above involved criminal prosecution by the DOJ, the second two cases involve civil enforcement actions by the SEC.
So, what is the difference between promoter cases that lead to civil and criminal charges?
One key factor is prison time. Civil enforcement actions do not involve prison time, whereas criminal actions may result in prison time Another key factor that distinguishes between civil liability and criminal culpability is the element of willfulness or intent. If a celebrity or other endorser accepts payment without realizing that doing so comes with legal obligations, he or she can face civil liability. But inadvertently violating the law does not warrant criminal prosecution in most cases. Conversely, if someone knowingly withholds or misrepresents information that is subject to disclosure (or intentionally attempts to defraud investors through other means), then criminal charges may be warranted.
Avoiding Liability for Securities and Cryptocurrency Promotion Violations
Given the substantial risks involved with illegally promoting a security, cryptocurrency, or other investment, what can—and should—celebrities and other endorsers do to protect themselves?
Avoiding unwanted scrutiny from the SEC and the DOJ involves taking a proactive approach to compliance. Before promoting investment opportunities online, celebrities and other influencers should ensure that they have a clear understanding of the disclosures that are required. They should conduct adequate due diligence to ensure that their public statements regarding the investment opportunity are accurate. There are plenty of investment opportunities out there; and, if an endorsement offer seems questionable or makes promises that seem too good to be true, then it will likely be best to decline the offer and pursue other options.
Defending Against SEC and DOJ Promoter Investigations and Enforcement Actions
What if it is too late to avoid scrutiny from the SEC or DOJ? Individuals who are facing investigations or enforcement actions related to their promotion of securities, cryptocurrency, or other investments should engage experienced defense counsel promptly. While there are a variety of ways to defend against these allegations, executing a comprehensive and cohesive defense strategy requires skilled legal representation.
Contact the Federal Defense Lawyers at Oberheiden P.C.
Our federal defense lawyers represent celebrity endorsers in SEC and DOJ cases nationwide. If you need to speak with a lawyer about an investigation or enforcement action, please call 888-680-1745 or contact us confidentially online today.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.