Member Article

In October, the Securities and Exchange Commission (the “SEC”) brought charges against Kim Kardashian (“Kardashian”) for failure to disclose payments she received in connection with promoting EthereumMax on Instagram. This article outlines why public persons and projects operating in the web3 ecosystem must tread carefully so as to not implicate unwelcome regulatory oversight. This is one of many reasons that the implementation and maintenance of a robust compliance program that includes marketing review of materials prior to publication can be a cost-effective insurance policy.

In exchange for approximately $250,000, Kardashian published a post to her approximately 225 million Instagram followers touting the project, which aims to “build a robust and scalable ecosystem that fully maximizes the power of DeFi, creating a wide range of products for our community that encompasses everything from a deflationary token and a core stablecoin for processing payments to cutting edge NFTs and exclusive events for our community.”

The SEC took the position that EthereumMax tokens (EMAX) qualify as securities due to (i) representations from the issuer regarding EMAX’s rise in price while offering and selling EMAX, thereby (ii) creating a reasonable expectation that EthereumMax and its agents would expend significant efforts to develop the EthereumMax platform (and thereby increase the value of EMAX), (iii) resulting in investor profit.

This action follows the SEC’s warnings in the July 25, 2017 DAO Report, which details the SEC’s position that digital assets may be deemed securities, thereby implicating issuers and promoters. Later that same year, the SEC issued a statement noting that “[a]ny 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. A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.”

“This case is a reminder that, when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors,” Gary Gensler, chairman of the SEC, said in a news release.

In this instance, instead of making a quick quarter million dollar profit, Kardashian ended up settling the matter for $1.26 million dollars.

 

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