Celebrity Endorsements of ICOs ‘May be Unlawful’, Says SEC

By Ray Crawford·2 November 2017·2 min read

Key Points

The Securities and Exchange Commission warned investors on November 1st that celebrities who promote initial coin offerings face serious legal consequences if they fail to disclose how much they are b

The Securities and Exchange Commission warned investors on November 1st that celebrities who promote initial coin offerings face serious legal consequences if they fail to disclose how much they are being paid for their endorsements. In a direct statement, the SEC said that celebrities posting endorsements across social media without disclosing compensation from the issuer are violating federal anti-touting rules. Specifically, the agency said that failing to reveal the nature, source, and amount of any compensation—whether direct or indirect—is a securities law violation. What concerned regulators is that some celebrities were accepting payment for backing ICOs while giving their followers no indication of the financial arrangement. Floyd Mayweather Jr., Paris Hilton, DJ Khaled, Harry Redknapp, and Luis Suarez have all endorsed various ICOs in recent months.

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Initial coin offerings have exploded as a fundraising mechanism for startups. Over the past 18 months, companies raised more than $3 billion through token sales, according to research firm Autonomous Next. Filecoin leads with $262 million raised in September. Tezos follows with $232 million from its July token sale. Overstock.com aims higher, planning to raise $500 million through a token sale before the end of this year.

Cryptocurrency price surges have fueled the boom. Bitcoin recently crossed $7,000, and as digital currencies climbed in value, startup teams rushed to launch new projects and token offerings. Developers found they could raise money faster through token sales than through traditional venture capital funding, which typically requires months of pitching and negotiation. Token sales compressed that timeline. Between November and December, about 100 additional teams plan to launch ICOs, according to Coinschedule. But rapid growth has attracted scammers. Some teams have raised money through token offerings and then disappeared with investor funds.

The SEC has taken notice of fraud in the space. The agency investigated The DAO token after a smart contract flaw caused the entire project to crash last summer. The vulnerability allowed attackers to extract funds directly from the system. That investigation led the SEC to conclude that DAO tokens qualified as securities under the Securities Act of 1933.

Charles Hoskinson, a co-founder of Ethereum, sounded an alarm in July about the overall trend. He pointed to what he saw as an "over-tokenisation of things" and noted that "people are blinded by fast and easy money" chasing ICOs.

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