SEC warns celebrities endorsing virtual currencies
The Securities and Exchange Commission took a first step Wednesday to head off the recent trend of celebrities endorsing new virtual currencies, warning that they could be breaking laws.
Entrepreneurs have been issuing the digital currencies through so- called initial coin offerings which have become a hot but largely unregulated method of fundraising for technology projects.
This year some 270 projects have raised over $ 3 billion by selling the currencies to investors. The vast sums of money have drawn in celebrities, like socialite Paris Hilton and rapper the Game, who have promoted particular projects, generally in exchange for a payment.
The SEC said Wednesday that celebrities who promoted coin offerings could be violating multiple laws, including fraud regulations and rules that govern investment brokers.
In language that suggested that the SEC could take enforcement action against these celebrities, the agency promised it would “focus on these types of promotions to protect investors and to ensure compliance with the securities laws.”
The regulatory warning followed an article in the New York Times about such celebrity endorsements. The article focused on a troubled project, known as Centra, that was promoted by boxer Floyd Mayweather and rapper DJ Khaled.
Centra raised $ 30 million with the help of the famous names. But the project’s founders appear to have misled investors on several points, including the ability of the project to issue debit cards, its primary product.
The SEC said in July that the entrepreneurs in charge of coin offerings could end up in trouble for violating securities law. But Wednesday’s statement focused on people promoting the coins. It said celebrities could be violating the law if they did not disclose that they were compensated.
Centra’s founders said they had paid Mayweather and DJ Khaled to promote the project’s virtual currency, known as centra tokens, in social media postings. But neither celebrity disclosed in his postings that he had been paid.
After being reached by the Times, Mayweather deleted some of the social media posts that endorsed Centra. Hilton deleted her post promoting a project known as Lydian Coin after Forbes wrote about the problematic legal history of the project’s founder.
Few of the other celebrities who have promoted ICOs have acknowledged being paid.
Beyond the potential issues around disclosure, the SEC said celebrities could end up violating several other laws, such as those that govern people who are categorized as brokers of securities.
The SEC put out a separate investor alert Wednesday, warning investors to be wary of endorsements from prominent people.
“It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment,” the alert said. “Celebrities, like anyone else, can be lured into participating ( even unknowingly) in a fraudulent scheme.”