On October 3, 2022, the Securities and Exchange Commission announced charges against Kim Kardashian for promoting a crypto asset security called EMAX, offered and sold by EthereumMax, on social media without disclosing the payment she received in exchange for the promotion. Kardashian agreed to settle the charges, paying $1.26 million in penalties, disgorgement, and interest, as well as cooperate with the Commission’s ongoing investigation, refrain from promoting any crypto asset securities for three years, and repay the $250,000 she was paid to promote the crypto asset security.
The charges against Kardashian arose from a June 2021 Instagram post where Kardashian asked her 250 million Instagram followers, “ARE YOU INTO CRYPTO??? THIS IS NOT FINANCIAL ADVICE BUT SHARING WHAT MY FRIENDS JUST TOLD ME ABOUT THE ETHEREUM MAX TOKEN! A FEW MINUTES AGO ETHEREUMMAX BURNED 400 TRILLION TOKENS – LITERALLY 50% OF THEIR ADMIN WALLET GIVING BACK TO THE ENTIRE E-MAX COMMUNITY” Her post included the hashtag “#ad,” and a link to “swipe up to join the E-Max community” directing users to the EthereumMax website with instructions on how to purchase the tokens. Investors later sued Kardashian as well as other celebrities including NBA star Paul Pierce and professional boxer Floyd Mayweather Jr. alleging that the celebrities artificially inflated the value of the asset.
Section 17(b) of the Securities Act of 1933 makes it unlawful for any person to tout a stock without disclosing the nature and substance of any consideration, whether present or future, direct or indirect, received from an issuer, underwriter or dealer. Despite Kardashian’s indication that the post was an ad, her conduct was found to violate federal securities law due to her failure to disclose the $250,000 payment she received in consideration of the endorsement. As stated by Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, “the federal securities laws are clear that any celebrity or individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion.”
SEC’s Years of Caution with Celebrity-Backed Endorsements of Investments
The Kardashian case serves as a reminder to celebrities, influencers and the like that the law requires certain disclosures to the public when promoting security investments. The SEC has long warned celebrities of the disclosure requirements needed for celebrity-backed endorsements of investments. In November 2017, the SEC released a statement providing that where a celebrity endorsement encourages the public to purchase stocks and other investments, such endorsements may be unlawful if they do not disclose the nature, source, and amount of compensation paid directly or indirectly in exchange of the endorsement. The failure to disclose is deemed a violation of the anti-touting provisions of the federal securities laws and persons making these endorsements may also be found liable for potential violations of the anti-fraud provisions, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.
As stated by Gensler, the hashtag “ad” may be appropriate under other laws to use to promote products such as perfume or vacation homes. “But these are the securities laws … and this was really to protect the investing public when somebody is touting a stock, and whether that’s a celebrity, an influence, or the like, that’s at the core of what this is about.”
The SEC’s decision to take action against Kardashian stems from the Commission’s concern for the public. As stated in the November 2017 release, celebrities who endorse an investment often lack sufficient expertise to ensure the investment is appropriate and in compliance with federal securities laws. Chair of the SEC, Gary Gensler elaborated in a video released by the SEC, that the Kardashian case is a reminder that when celebrities/influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean those investment products are right for all investors. Gensler’s concern is derived from the power that celebrities and influencers have on the public, influencing based on factors unrelated to expertise in investments. Gensler urges investors not to make investment decisions based solely on the recommendations of a celebrity or influencer. He adds that even when an endorsement is genuine, each investment has its own risk and opportunities that may not meet an individual’s needs and a celebrity’s incentives do not always align with the individual being influenced. Gensler finds this especially important in the crypto and digital asset context due to the highly speculative nature of such investments.
Kardashian’s endorsement is especially concerning to the SEC due to her status. As indicated in A Morning Consult survey, 1 in 5 Americans saw Kardashian’s post about EthereumMax, far surpassing other celebrity and influencer promotions. Moreover, EthereumMax had just launched a month before her post in May 2021, was not widely tested, and is relatively unknown. Over the last few years, several SEC chairs and commissioners such as Gensler and Hester Pierce have urged the development of a clear crypto regulatory framework. The Kardashian suit appears to be just the most recent step in that direction.