The SEC Continues to Prove it is the Most Powerful Influencer: How to Avoid Touting Charges
9 min read
Overview
Recently, the US Securities and Exchange Commission ("SEC" or "the Commission") announced charges against eight celebrities, including Jake Paul, Soulja Boy, Lindsay Lohan, and Ne-Yo for unlawfully touting digital tokens without disclosing that they were compensated for doing so and the amount of their compensation. Notably, the SEC also simultaneously charged crypto asset entrepreneur Justin Sun and three of his wholly-owned companies for, among other things, aiding and abetting these touting violations.1
This sweeping high-profile action, which followed just months after similar charges were brought against Kim Kardashian and former NBA star Paul Pierce, serves as a warning that both celebrities who post promotional material and companies that are the subject of the promotions on social media are not immune from the federal securities laws. As companies continue to increase online marketing by hiring spokespeople with notable social media presence, it is important to keep in mind that regulators are closely watching to ensure that appropriate disclosures regarding compensation are made.
When asking celebrities to promote a security, it is imperative that companies take care to ensure that the public figures disclose both the fact, and the amount, of the compensation they are receiving. Investors must be able to discern whether a promotion is a paid endorsement or is coming from an unbiased party.
Background on Touting
Section 17(b) of the Securities Act of 1933 ("the Securities Act") mandates that if a person is paid by an issuer to promote a security, the person must disclose the nature, source and amount of such compensation.2 Specifically, Section 17(b), also known as the anti-touting provision, makes it unlawful for any person 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."3
To establish a Section 17(b) violation, "a person must (1) publish or otherwise circulate (using a means of interstate commerce), (2) a notice or type of communication (which describes a security), (3) for consideration received (past, currently, or prospectively, directly or indirectly), (4) without full disclosure of the consideration received and the amount."4 To that end, Section 17(b) was designed to protect the public from publications that "purport to give an unbiased opinion but which opinions in reality are bought and paid for."5
Section 17(b) does not require a finding of intent.6 The SEC must only prove that the relevant promotion occurred without the accompanying necessary disclosure. To establish aiding and abetting of a Section 17(b) violation, however, the SEC must demonstrate that the person or company knowingly or recklessly provided substantial assistance to the person who violated Section 17(b).7
March 2023 Touting Charges
On March 22, 2023, the SEC charged eight celebrities for illegally touting Mr. Sun's digital assets, Tronix ("TRX") and BitTorrent ("BTT"), which the SEC considers are securities, in violation of Section 17(b) of the Securities Act.8 The celebrities charged included actress Lindsay Lohan, social media personality Jake Paul, rappers DeAndre Cortez Way (known as "Soulja Boy") and Miles Parks McCollum (known as "Lil Yachty"), and singers Austin Mahone, Shaffer Smith (known as "Ne-Yo") and Aliaune Thiam (known as "Akon").9 With the exception of Soulja Boy and Mr. Mahone, the six other celebrities agreed to settle the SEC's charges, without admitting or denying the SEC's findings, by paying a total of more than $400,000 in disgorgement, interest and civil penalties, and agreeing to refrain from touting any crypto asset for three years.10
The SEC also charged Mr. Sun and three of his wholly-owned companies, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry, Inc. for aiding and abetting these violations of Section 17(b), in addition to other securities law violations. The SEC's complaint against Mr. Sun, his companies, Soulja Boy and Mr. Mahone, alleges that beginning in or about January 2021, the celebrities posted pre-scripted, promotional materials to their respective social media accounts without disclosing that they had been paid to tout the TRX and BTT tokens or the amounts of the compensation they received.11
The complaint further alleges that Mr. Sun misrepresented the truth about the touting campaign he had orchestrated by falsely stating on social media: "If any celebrities are paid to promote TRON, we require them to disclose."12 Mr. Sun, however, drafted or approved the specific language of each post, arranged the payments to celebrities, and knew that the payments were not disclosed. In fact, Mr. Sun specifically directed the celebrities to refrain from disclosing that they were being compensated.13 Mr. Sun then amplified the celebrities' promotional posts on social media by commenting on the posts or retweeting them.14
SEC Settlements with Kim Kardashian & Paul Pierce
In October 2022 and February 2023, the SEC also announced settled enforcement actions against Kim Kardashian and former professional basketball player and sports analyst Paul Pierce for violating Section 17(b).15 Both were charged for promoting EMAX tokens, the crypto asset offered by EthereumMax, without making the necessary disclosures.16
According to the SEC's order, Ms. Kardashian was paid $250,000 for sharing a promotional post with the 225 million Instagram followers she had at the time.17 The SEC order stated that Ms. Kardashian violated Section 17(b) by touting the security on her social media account without disclosing that she received compensation from EthereumMax and by failing to disclose the amount of compensation she received.18
Without admitting or denying the SEC's findings, Ms. Kardashian agreed to settle the charges by paying $1.26 million to the Commission.19 The SEC order stated that Ms. Kardashian also agreed to refrain from promoting any crypto asset securities for a period of three years, and agreed to continue cooperating with the SEC's investigation in the matter.20
Mr. Pierce issued a total of six promotional posts to his Twitter account, where he had more than 4 million followers at the time. In addition to finding violations based upon Mr. Pierce's negligence in issuing posts that he knew or should have known were materially false and misleading, the SEC order found that Mr. Pierce failed to disclose in each post that the issuer was compensating him for the promotional material and the nature and amount of his compensation.21 Although it appeared that Mr. Pierce was unbiased in his Twitter postings, he received at least eight transfers of EMAX tokens in exchange for the endorsements, totaling approximately $244,116.22
Without admitting or denying the SEC's findings, Mr. Pierce agreed to pay $244,116 in disgorgement, $15,449 in prejudgment interest and a civil money penalty in the amount of $1,150,000 to the Commission.23 Mr. Pierce also agreed to refrain from touting any crypto asset for three years.24
Conclusion
While these recent actions involved crypto assets, any security is subject to the anti-touting provision and, historically, the SEC's enforcement of Section 17(b) has involved securities issued by US listed public companies. Companies are not often charged with aiding and abetting touting violations.25 The SEC has, however, shown its willingness to do so with this recent action against Mr. Sun's companies. Accordingly, US public companies should take heed of these actions both due to the reputational risks associated with actions against celebrities who have promoted their securities and now the heightened risk of aiding and abetting charges.
Zeinab Khalil (White & Case, Law Clerk, New York) contributed to the development of this publication.
1 The SEC also charged Mr. Sun and his wholly-owned companies with violating the registration and anti-fraud provisions of the Securities Act of 1933, as well as the anti-manipulation and anti-fraud provisions of the Securities Exchange Act of 1934.
2 See e.g., In re Galena Biopharma Derivative Litig., No. 3:14-cv-382-SI LEAD, 2014 U.S. Dist. LEXIS 150986, at *36-37 (D. Or. Oct. 22, 2014) (explaining that Section 17(b) of the Securities Act prohibits disseminating information about a security without disclosing any consideration to be received in connection with same).
3 See 15 U.S.C.S. § 77q (b).
4 SEC v. Gorsek, 222 F. Supp. 2d 1099, 1105 (C.D. Ill. Apr. 20, 2001) (finding that there was no genuine issue of material fact whether certain defendants violated Section 17(b) because of their failure to disclose the amount and type of consideration received for the relevant communications).
5 Id.
6 SEC v. Liberty Capital Group Inc., 75 F. Supp. 2d 1160, 1163 (W.D. Wash. Feb. 18, 1999) (finding that unlike Section 17(a)(1) which prohibits fraud in the sale of securities and implies an element of intent, Section 17(b) does not state or require an element of intent).
7 See 15 U.S.C.S. § 78t (e).
8 According to the SEC's complaint and relevant SEC orders, TRX and BTT were offered and sold as investment contracts, making them subject to the federal securities laws.
9 Press Release, U.S. SEC. & EXCH. COMM’N, SEC Charges Crypto Entrepreneur Justin Sun and his Companies for Fraud and Other Securities Law Violations (Mar. 22, 2023), https://www.sec.gov/news/press-release/2023-59.
10 See In re Shaffer Chimere Smith, Securities Act Release No. 11170, at 4 (Mar. 22, 2023); In re Jake Joseph Paul, Securities Act Release No. 11171, at 4 (Mar. 22, 2023); In re Aliaune Damala Badara Akon Thiam, Securities Act Release No. 11172, at 4 (Mar. 22, 2023); In re Lindsay Dee Lohan, Securities Act Release No. 11173, at 4 (Mar. 22, 2023); In re Michele Anne Mason, Securities Act Release No. 11174, at 4 (Mar. 22, 2023); In re Miles Parks McCollum, Securities Act Release No. 11175, at 4 (Mar. 22, 2023). The case against the remaining defendants is pending in the U.S. District Court for the Southern District of New York.
11 Complaint, SEC v. Justin Sun et al., No. 1:23-cv-02433-ER (S.D.N.Y. Mar. 22, 2023), ECF No. 1.
12 Id. at 44.
13 Id. at 42.
14 Id.
15 In re Paul Anthony Pierce, Securities Act Release No. 11157 (Feb. 17, 2023) [hereinafter Pierce]; In re Kimberly Kardashian, Securities Act Release No. 11116 (Oct. 3, 2022) [hereinafter Kardashian].
16 Pierce, supra note 15, at 2. According to the SEC order, the EMAX tokens promoted by Pierce were offered and sold as investment contracts and were therefore subject to regulation by the SEC. See also Kardashian, supra note 15, at 2.
17 Kardashian, supra note 15, at 2-3.
18 Id. at 4.
19 Id. at 5.
20 Id. at 4-5.
21 Pierce, supra note 15, at 6.
22 Id. at 2-3.
23 Id. at 7.
24 Id.
25 On April 10, 2017, the Commission announced enforcement actions against 27 individuals and entities involved in various schemes to tout company stocks. See In re Galena Biopharma, Inc. and Mark J. Ahn, Securities Act Release No. 10337 (Apr. 10, 2017) (finding that Galena Biopharma, Inc. caused violations of Section 17(b) in the promotion of Galena securities); see also In re Lion Biotechnologies, Inc., Securities Act Release No. 10340 (Apr. 10, 2017) (finding that Lion Biotechnologies, Inc. caused others to violate Section 17(b) in promoting Lion securities without the appropriate disclosures); see also In re Galena Biopharma Derivative Litig., 2014 U.S. Dist. LEXIS 150986, at *83 (stating that a company soliciting or paying for the recommendation might be held accountable for aiding and abetting in an enforcement action).
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