For a super-celebrity like Kim Kardashian, who endorses everything from “flat-tummy” lollipops to laser hair removal systems, creating crypto-token plugs on her Instagram account was a regular occurrence. maybe.
U.S. Securities and Exchange Commission (“SEC‘) But had a different view that Kardashian reportedly paid a $1.26 million fine, disgracement, and pre-judgment interest in September.according to the SEC. press release On October 3, 2022, Kardashian was paid US$250,000 to promote a crypto token offered and sold by Ethereum Max (“Emax”) to 250 million followers on Instagram last June. The promotional post included a link to his Emax website with instructions for investors to purchase his Emax tokens. Kardashian has not disclosed that she was paid for the promotion.This violates Section 17(b) of the U.S. Federal Law securities law 1933’sThat section makes it unlawful to advertise securities without disclosing the amount received or to be received (or any other benefit), directly or indirectly, from the issuer, underwriter, or dealer. The reality TV star agreed to cooperate with the SEC investigation and not promote crypto securities for three years.
Kardashian isn’t a total ignorance of the law, as she went through a “baby bar” in California last year. It is also speculated that celebrities and influencers seek legal advice before posting anything on social media that has legal consequences. So what about the securities laws governing the promotion of crypto assets that make them legal “black boxes”?
Enforcement of US anti-propaganda laws
SEC guidance first appeared in November 2017 statement Celebrity-backed initial coin offerings (“ICOs”), which said it violated the anti-propaganda provisions of federal securities laws by failing to disclose the required information. Participating in unregistered offerings and sales of securities or acting as an unregistered broker may also result in anti-fraud provisions.
The Kardashian case is the latest in a string of enforcement actions by the SEC. DJ Khaled, Floyd Mayweather When Steven Seagal Similar consequences for similar crimes. In October 2020, the SEC Paid John McAfee, founder of antivirus software McAfee, promoted an ICO to his Twitter followers without disclosing that he received more than $23 million in digital assets from doing the ICO.July 2021, SEC teeth Paid of UK-based operators www.coinschedule.com approximately US$197,000 for failing to disclose compensation received from issuers of digital asset securities profiled on the website;
of the SEC A Framework for ‘Investment Contract’ Analysis of Digital Assets April 2019 (“Framework”) attempted to clarify whether a digital asset qualifies as an investment contract (a kind of security). The Framework echoed the law set by the United States Supreme Court. SEC v. WJ Howey Co.328 US 293 (1946) An investment contract is a contract, a transaction, under which one person invests money in a common enterprise and expects profits only from the efforts of others, whether or not it has the characteristics of typical securities. , or means a plan. The responsibility of analyzing the relevant transaction to determine whether federal securities laws apply shall rest with the issuer who markets, offers, sells, resells or distributes the digital asset and in others.
In April of this year, SEC Chairman Gary Gensler said: speech Crypto trading platforms serve a similar role as traditional regulated exchanges and as a result deserve registration and regulation. I added that it was a contract. Not surprisingly, given the SEC’s recent history, there has been an increase in the number of pyramid scheme perpetrators who falsely promise investors cryptocurrency wealth, fraudulent cryptocurrency trading funds, unregistered offers and crypto lending products. It has punished sales, and fraudulent crypto-mining schemes.
What if the Kardashians set their sights on ‘True North’?
Canada does not have a federal securities regulator like the US SEC. This is thanks to the Canadian Constitution, which gives provinces jurisdiction over property and civil rights. However, Canada does not have a Canadian Securities Administrator (“CSA”), a consortium of securities regulators from ten states and three territories with primary responsibility for promoting a harmonized approach to securities regulation nationwide. Canada has the Canadian Investment and Industry Regulatory Authority (“Ii Rock) is a self-regulatory organization overseen by the CSA that regulates the trading activities of investment dealers and the equity and bond markets.
Here, Kardashian’s Instagram post is a “substantial and substantial effort” to attract securities regulation in two Canadian provinces, British Columbia and Ontario, which are among the largest contributors to Canada’s GDP. Let’s assume it passes the “connectedness” test.
In November 2018, CSA CSA Staff Notice 51-356 Problematic Promotional Activities by Publishers To account for certain issues in promotional activity by issuers that provide “unbalanced or unsubstantiated material claims about the issuer’s business.” Concerns noted in the notice include: “Using social media or general investment blogs to promote issuers but failing to disclose agency, compensation, and/or financial interest 3rd party compensation”. (Remember anyone?) The notice clarifies that failure to comply may result in enforcement action or regulatory action requiring the publisher to issue a news release. Retract or remove overly promotional language from any disclosure records (including website and/or social media); and/or resubmit the Continuous Disclosure Statement.
British Columbia is securities law (“action), effective March 2020, Securities Commission of British Columbia (“BCSC”) with more tools to deal with problematic promotional efforts. One of the amendments introduced a new prohibition to section 50(3) of the Act against making false or misleading statements when engaging in advertising activities. important in making investment decisions.
Around the same time Kardashian settled with the SEC, BCSC ordered MGX Minerals Inc., a mining company in British Columbia and the publisher of the report in British Columbia, and its CEO, for failing to disclose that advertising and social media posts were issued on behalf of the company. It sought a settlement amounting to a total of $35,000 Canadian dollars. of BCSCs news release The Sept. 20 article said multiple promotional posts were made by 17 social media influencers on platforms such as Twitter, Facebook and LinkedIn. Everything was made to appear as objective journalistic content. Some posts indicated that a fee had been paid, but did not identify the payer or recipient. MGX Minerals Inc. partnered with a marketing company to conduct investor relations.
Given these laws and precedents, Kardashian will surely run into trouble with BCSC for the same reasons she did with the SEC.
of final presentation Capital Markets Modernization Task Force (“task force”) recommends creating new specific prohibitions against making misleading or false statements about public companies (Policy Recommendation 74). was established to review and modernize the state’s capital markets regulatory framework. This ban allows the Ontario Securities Commission (“OSC”) to take action against individuals or entities whose statements may “influence the investment decisions of reasonable investors”. Importantly, the report recommends that the OSC need not prove causality between market distortions and statements. “A mere intent to influence the market or influence rational investor decisions is sufficient.”
Kardashian could also face music from OSC once the Task Force’s recommendations become law.
Reminder for Canadian Issuers
For issuers, private or public, it is never a bad time to remember the policy and legislative underpinnings of Canadian non-advertisement clauses and securities laws in general, which have been modeled in many respects on U.S. law. . Year.Supreme Court of Canada Pacific Coast Coin Exchange v. Ontario Securities Commission,  2SCR112, employed the Howey test to determine whether an instrument constitutes an investment contract. Importantly, the court securities law (Ontario) is actually targeting not only fraudulent schemes, but arrangements in which the customer cannot know the exact value of the investment they are making. The term “alone” in (investing money and profits solely from the efforts of others) is watered down in many US jurisdictions.
of Pacific coast The ruling also instructs securities regulators, considering economic realities and investor protection policy objectives, to: securities law (Ontario). Substance, not form, drives investment contract decisions. CSA has made this line clear in staff notices since 2017 (Staff Notice 46-307 When 46-308).
For social media influencers like Kim Kardashian, what this means is that they need to be careful not to violate any jurisdictional securities laws that their endorsements may affect.