David Klein Featured in WSJ: What to Know About (Legally) Marketing Crypto Assets

By: Megan Graham

View the original article in The Wall Street Journal here.

The SEC settled with Kim Kardashian over her promotion of a cryptocurrency. Here is how influencers and marketers can stay above board with crypto messaging.

Kim Kardashian’s $1.26 million settlement with the Securities and Exchange Commissionover a cryptocurrency promotion highlighted the risk that even experienced marketers and influencers can face as they pitch similar assets in a nascent, fluid sector.

Ms. Kardashian was facing allegations that she didn’t sufficiently disclose her $250,000 payment to hype EMAX tokens on her Instagram account. The post in question included the label “#AD,” but Ms. Kardashian should have revealed how much she was paid and by whom, the SEC said. 

If she had been peddling everyday consumer goods, the “ad” label arguably might have been enough for the Federal Trade Commission, which has typically handled matters involving influencers and their endorsements, some experts said. 

The SEC maintains a different standard for those pushing anything it considers a security. The “anti-touting” provision has been part of the securities laws for decades and is intended to help investors know when a person has a conflict of interest that might affect their recommendation to buy or sell a security.

The cryptocurrency boom has attracted many investors, including less experienced ones, raising questions about what is appropriate when marketing these types of assets.

Many heavily promoted initial coin offerings went nowhere, among other activities that caused consumers to lose their investments, said David Klein, a managing partner at marketing law firm Klein Moynihan Turco LLP. “The SEC has been tasked with getting involved and making sure that this kind of thing does not continue to happen” without regulatory consequences, he said.

Here’s what marketers should know about the SEC’s latest move and what it means for influencers.

How can brands and influencers stay above board?

When it comes to crypto, brands and the influencers they work with should err on the side of caution and be clear when an influencer has been compensated for their endorsement, whether it’s monetarily or otherwise, said Lartease Tiffith, executive vice president for public policy at the Interactive Advertising Bureau, a digital media and marketing trade association.

“It’s better to overdisclose,” he said. “Even if you think that you may be in a gray area, so to speak, it’s better to just be clear.”

Mr. Klein said that social-media influencers and companies should get legal advice early in the marketing planning to ensure compliance with all applicable regulations. 

“The fact that something’s happening on social media does not mean that the old rules of the land don’t apply. They do,” he said.

Why did the SEC handle this?

The SEC can get involved when promotions involve securities, which can bring much bigger stakes for consumers than a typical ad.

“There’s a lot more risk for the general consumer than buying a dress or buying a diet product that’s being sponsored by celebrities online,” said Fara Sunderji, a partner at law firm Dorsey & Whitney LLP. “You obviously could lose a lot of money buying any type of product. But these are a lot more protected, sensitive areas where we want to make sure that people know what they’re doing.”

The SEC said as it announced its settlement that promoting securities must meet specific requirements.

“The federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,” said Gurbir Grewal, director of the SEC’s division of enforcement, in the announcement.

When is something a security?

The SEC has warned that virtual tokens or coins sold in initial coin offerings may be securities, and that anyone who offers and sells securities in the U.S. must comply with federal securities laws.

Christopher Gerold, a partner in the crypto practice at law firm Lowenstein Sandler LLP, said the SEC uses a certain test to see what falls in that definition. Mr. Gerold was the chief of the New Jersey Bureau of Securities in 2018 when it took action against a crypto asset touted by the actor Steven Seagal, in part because payments to Mr. Seagal weren’t disclosed.

Considering whether digital assets are securities involves deciding whether something includes an investment contract, a test met when it involves investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.

But the subject has brought disputes.

“Over time, especially in the crypto space, we’ve seen [people] try to call it different things to avoid the securities laws,” Mr. Gerold said. 

Some involved in the crypto industry argue that bitcoin and some stablecoins are commodities, he added. Federal agencies and congressional committees have disagreed over which regulator should have oversight of cryptocurrencies by variously casting them as commodities or securities.

“There’s a lot of debate still to this—What is a security? What is a commodity? What is something else?” Mr. Gerold said.

Are stars in Super Bowl commercials exposed?

Cryptocurrency companies such as FTX and Crypto.com have tapped celebrities from Larry David to LeBron James to tout their companies in ads, including in commercials that ran during this year’s Super Bowl

Just appearing in a TV commercial doesn’t mean those messages are necessarily any more protected than a short social-media post. Mr. Gerold said it can depend on what the stars are saying in these ads. If they are making more general statements about the platforms, that is considered to be different than giving investment advice about a specific security.

“You run into proper trouble when you’re promoting an issuer of a security,” he said.

Photo by Jievani Weerasinghe on Unsplash

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