When #ad Is Not Enough

Kim Kardashian has recently settled charges leveled against her by the Securities and Exchange Commission (SEC) in connection with her promotion of cryptocurrency tokens offered by EthereumMax (EMAX Tokens). Back in June of last year, Kardashian posted an Instagram story “sharing what my friends just told me about the Ethereum Max token!”. And although Kardashian included “#ad” in her Instagram story, the SEC charged her for failing to adequately disclose that she was being paid to promote the EMAX Tokens as a security.

Influencer marketing has become increasingly prominent over the past decade, in many ways supplanting traditional advertising when it comes to attracting younger, more digitally oriented consumers. With that increased prominence has come increased scrutiny by U.S. regulators, most frequently, the Federal Trade Commission (FTC).

Section 5 of the FTC Act prohibits “unfair or deceptive acts or practices in or affecting commerce”, and the FTC has become increasingly vocal about the importance of placing prominent disclosures of any payments being made to induce influencers into promoting any products or services.This has mostly amounted to influencers and brands including language like “#ad”, “#paid”, or “#brandambassador” prominently in influencer posts to ensure the general public knows that the influencer is being compensated for the advertisement.

But while this may satisfy Section 5 of the FTC Act, it does not relieve influencers and brands from their obligations to comply with other laws governing other regulated products and services such as tobacco, pharmaceuticals, or in Kardashian’s case, securities. Influencers have become used to thinking about marketing regulations as a singular issue of ensuring consumers know there is a contractual relationship between influencer and brand. And yet, we’re confident (mostly) that if you asked an influencer if it would be ok to promote a new methamphetamine company so long as they said “#ad”, they would know the answer is “no.”

In the Kardashian example, the SEC charged her with illicitly touting the EMAX token without disclosing the amount she was paid for the promotion. The promotion, according to the SEC, violated Section 17(b) of the Securities Act of 1933 that requires disclosure of the amount paid by a securities issuer whose securities are being promoted. This is a law that typically would be used to charge an investment adviser for taking kickbacks (though, for clarity, Kardashian’s inclusion of “this is not financial advice” was also not enough to avoid scrutiny).

The SEC’s actions will likely have a chilling effect on influencer activity in the cryptocurrency space, as disclosing the specific amount paid by a crypto-issuer could take a lot of the appeal out of these advertisements to consumers. What will be interesting is the effect it has on influencer marketing of other NFT-based businesses that do not consider themselves ‘securities’ governed by the SEC.

While SEC chair Gary Gensler has said that he believes the vast majority of crypto tokens are in fact securities, he has conceded the idea that some will not meet the definition of a security (making them what he calls “non-security tokens”). However, little guidance beyond the Howey test from 1946 exist for determining what tokens are securities in a market flooded with tokens claiming to offer utility rather than an investment. It will be interesting to see if this is the tip of the iceberg for influencer charges, or a flash in the pan.

Either way, the lesson here is that simply adding “#ad” will not be a cure-all for any and all marketing activities. And although it may be sufficient to overcome scrutiny under Section 5 of the FTC Act, it does not protect influencers from all regulatory requirements in the promotion of securities or other products and services covered by other laws and agencies (such as the FDA, ATF, etc.)

Influencers and brands alike should consult with attorneys when crafting their social-media posts, as well as the contracts governing such marketing activities to ensure alignment on responsibility for legal violations. But given the lack of public agreement on what the SEC will deem a “non-security token” in the crypto world, this will almost certainly not be the last case of this nature.

About the Authors

Bryan Sterba and Matthew Savare are tech, IP and digital media attorneys at law firm Lowenstein Sandler LLP