By: Jonathan C. Dunsmoor, Esq. and Joseph Sandres, J.D. candidate
The Content below is provided for EDUCATIONAL PURPOSES ONLY and should not be construed as legal advice on any subject matter. Readers should contact their attorney directly to obtain advice with respect to any particular legal matter.
The deconstruction of Kim Kardashian’s multi-billion-dollar empire establishes the power of sex and publicity as the basis of its success. This provocative foundation has continued to support Kardashian’s career and the very nature of her fame is the definition of the word “thot.” First and foremost, there can be all sorts of thots but, according to Urban Dictionary, a thot is “A female that uses her body in some way to gain attention or some favor from males. Commonly used to describe female streamers on twitch that uses such tactics.”[1] EthereumMax or $EMAX, recently harnessed the power of Kardashian’s Instagram influence to promote their native token in exchange for $250,000 and that’s when the SEC came knocking at her door. We are now entering an era where the line between cryptocurrencies and securities is being drawn and not even celebrities are immune to securities regulations, but who is drawing the line and how do you know if you cross it?
In a rather bold statement, the SEC has charged Ms. Kardashian with “touting” a cryptocurrency security under section 17(b) of the Securities Act for her involvement with EthereumMax. Section 17(b) makes it unlawful to:
…publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.[2]
It is also important to understand that the Securities and Exchange Commission’s (“SEC”) enforcement actions extend beyond just those who are directly involved in the endorsement or touting of securities. It is also possible for people who are associated with those involved in such activities to be held liable if they have knowledge of any potential violations of securities law. For example, a business partner could be held liable if they have knowledge that their partner was receiving payment.
The now question is, was the sex-tape-making-powerhouse touting a security or simply promoting a digital currency, that is not a security?
Today, the complex definition of what a cryptocurrency is part of the legal complications of the multi-trillion-dollar industry and the subject of the most recent Coinbase litigation. In determining if a digital asset constitutes a security, the SEC uses the 76-year-old Howey test[3] (yes, it is old), which asks if the offer and sale of the asset is (1) an investment contract, a (2) common enterprise is involved, and if there is (3) a reasonable expectation of profits derived (4) from the efforts of others.[4] However, if the Howey test does not apply, then the panic to categorize such assets outweighs the necessary questions that may help us improve our regulation. In return, the Commodity Futures Trading Commission (“CFTC”) believes the digital assets, like Bitcoin and Ethereum, are commodities and thus subject to their jurisdiction and not the SEC’s.
Another famous male thot was John McFee (“Press F to pay respects in the comments”) who was charged by the CFTC for touting numerous digital assets, including Verge (XVG), Dogecoin (DOGE), and Reddcoin (RDD) under the Commodity Exchange Act, 7 U.S.C. §§ 1–26 (2018), and Commission Regulations (“Regulations”), 17 C.F.R. pts. 1–190 (2020), specifically Sections 6(c)(1), 6(c)(3), and 9(a)(2) of the Act, 7 U.S.C. §§ 9(1), (3), 13(a)(2) (2018), and Regulations 180.1(a) and 180.2, 17 C.F.R. §§ 180.1(a), 180.2 (2020).[5] Sadly, Mr. McFee would not see his opportunity to fight these allegations and he allegedly took his own life.
So, if two of the most powerful regulators on the planet don’t know which has jurisdiction or claim they both do, then how are you as a consumer supposed to know? Ideally, any true non-security token has sought counsel and has informed the marketing professionals, including influencers (thot and non-thots alike), that the Federal Trade Commission (“FTC”) rules apply because it’s not a security. The hashtag “#ad” is well understood within the marketplace to mean that this is a paid promotion. Also, the FTC requires disclosure if a person has been compensated for their opinion and that’s why you see “#sponsored” or “#ambassador” when scrolling through social media. The FTC also has a strict rule on false advertising or the use of deceptive language.
Ms. Kardashian may not have disclosed the $250,000 deal, but she disclosed that she had been paid by EthereumMax by using the hashtag “#AD” on her Instagram story. (Contrary to what the SEC order stated that it was a post; stories self-delete and posts are permeant unless deleted)[6]. Even so, the SEC order did not acknowledge that this was and continues to be a conventional method for social media influencers to demonstrate a financial relationship.[7] Quite possibly, such a conventional method of disclosing a financial relationship within the social media space might arguably fit the description “disclosing the receipt, whether past or prospective, of such consideration.”[8] Nonetheless, the fact that the SEC continues to go after the marketing professionals or celebrities like Ms. Kardashian, Floyd Mayweather and DJ Khalid instead of the underlying token proves that there is confusion within the marketplace and that the value of all of the headlines this garnered has left us no better off than the corporate thots we buy from. #FreeKim #FreeFloyd #FreeDJKhalid
The Commission’s Division of Enforcement and Office of Compliance Inspections and Examinations issued a public warning that all influencers need to consider– “[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.”[9]
Pretty straightforward, right? Well, not exactly since as stated above both the CFTC and SEC disagree who has jurisdiction. That’s because the question still remains: Is the digital asset a security? Under the current regulations, if a digital asset is not a security, then it does not fall under securities regulations. If it is a security, it must be disclosed including the payment amount. If it is not a security, and check with your legal counsel as this is not legal advice, then it does NOT have to be disclosed. Just in case this isn’t clear, or we need to say it louder for the people in the back. IF IT IS A SECURITY, IT HAS TO BE DISCLOSED. IF IT IS NOT, IT DOES NOT HAVE TO BE DISCLOSED. Now, unfortunately, the analysis of what is and what isn’t a security is, as stated above, is currently being wrestled into submission by two of the most powerful regulators on the planet, the SEC and the CFTC. #noregulationwithoutrepresentation #SECvsCFTC
What do you do with this information? How do you protect yourself?
- If you’re a cryptocurrency buyer, be careful who you are buying from! I would gladly trust Ms. Kardashian for makeup advice or sex tape lighting advice but I would not trust her with crypto related advice including but not limited to publications that may or may not be about securities. If she said Bitcoin was a great buy, would you care? More importantly, look at the team and what is going on. I know there a lot of non-doxxed teams as Web3 loves its anonymity but in this day and age we need to triple check everything especially after the rise and fall of Luna, FTX, Celsius, and others.
- If you’re a company, using advertising and marketing professionals is necessary for almost all businesses especially in the crypto industry when there are so many “opportunities.” Be careful who you hire. Make sure they are respected within the community. If you want people to respect your project, make sure you hire respected people, and they obey the law. We are in this together.
- If you’re the SEC reading this, hello! We kindly recommend the funds that Ms. Kardashian is “giving you” be utilized to help promote investor education in this space. Recognizing that high profile cases do help the investing public cannot be construed with providing investors with the proper information needed to stay within the law and we are happy to help with that. We have incredible influencers who would be more than happy to provide content that helps keep everyone out of trouble. After all, education is key! #givepeaceachance
- If you’re an influencer, whether crypto or thot and non-thot alike, be careful who you’re promoting and what. NEVER hesitate to ask more questions to be certain of what it is you may be affiliating yourself with. Ask for information and then send it to your knowledgeable lawyer for written confirmation. If not, you may end up following Ms. Kardashian down a pricey road– hers being one with a $250,000 disgorgement, $10,415.35 in prejudgment interest, a whopping $1,000,000 in civil money penalties to the SEC, and a 3-year ban on any partnerships with crypto companies; all to be done within 20 days of the order being issued.[10]
- LAST BE NOT LEAST WHEN IN DOUBT CONTACT A LAWYER AND GET IT IN WRITING.
[1] https://www.urbandictionary.com/define.php?term=Thot
[2] Securities Act of 1933, §17(b). https://www.govinfo.gov/content/pkg/COMPS-1884/pdf/COMPS-1884.pdf
[3] Securities and Exchange Commission v. W.J. Howey Co. et al., 328 US 293 (1946). https://www.law.cornell.edu/supremecourt/text/328/293
[4] SEC. Framework for “Investment Contract” Analysis of Digital Assets. https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets
[5] CFTC Charges Two Individuals with Multi-Million Dollar Digital Asset Pump-and-Dump Scheme , March 5, 2021, https://www.cftc.gov/PressRoom/PressReleases/8366-21
[6] SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security, October 3, 2022, https://www.sec.gov/news/press-release/2022-183
[7] It should be noted that an Instagram Story, unless saved by the publisher, cannot be replayed. This means that while this was presumably viewed by millions of people given Ms. Kardashian’s celebrity status, it was not view able for more than 24 per Instagram, https://help.instagram.com/1729008150678239#:~:text=Photos%20and%20videos%20you%20share,share%20your%20story%20to%20Feed.
[8] Securities Act of 1933, §17(b). https://www.govinfo.gov/content/pkg/COMPS-1884/pdf/COMPS-1884.pdf
[9] Div. Of Enforcements & Office of Comp. Insp. And Exam. (Nov. 1, 2017). https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos
[10] SEC Order. Kimberly Kardashian. https://www.sec.gov/litigation/admin/2022/33-11116.pdf