Kracking Down on Krypto: Kim Kardashian Pays $1.26 Million to the SEC

by Caroline Hardig, Associate Member, University of Cincinnati Law Review Vol. 91

I. Introduction

In 2021, 3.8 million posts on Instagram were tagged with #ad.1Number of #ad Posts on Instagram in 2020 and 2021, Statista, https://www.statista.com/statistics/693775/instagram-sponsored-influencer-content/ [https://perma.cc/42Y2-W4VU] (last visited Oct. 17, 2022). Kim Kardashian is one of the many influencers who engage in promoting different products on Instagram.2Marty Swant, After Kim Kardashian’s SEC Settlement, Influencers Working With Brands Could Face More Scrutiny- and Fines, Digiday (Oct. 4, 2022), https://digiday.com/marketing/after-kim-kardashians-sec-settlement-influencers-working-with-brands-could-face-more-scrutiny-and-fines/ [https://perma.cc/HW43-NMWY]. However, one of her advertisements cost her a large amount of money when she posted a certain advertisement on Instagram.3Chris Isidore & Matt Egan, Kim Kardashian Charged by SEC, Agreed to Pay $1.3 Million, CNN (Oct. 3, 2022, 2:56 PM), https://www.cnn.com/2022/10/03/investing/kim-kardashian-sec-fine [https://perma.cc/2FZB-E2F5]. Her Instagram story read: “Are you guys into crypto???? This is not financial advice but sharing what my friends told me about the Ethereum Max token! A few minutes ago Ethereum Max burned 400 trillion tokens- literally 50% of their admin wallet giving back to the entire E-Max community.”4Mairem Del Río, What is Ethereum Max? This Cryptocurrency Has Kim Kardashian in the Sights of the British Government, it Rose 1,370% in Two Weeks! Yahoo! Finance (Sept. 7, 2021), https://finance.yahoo.com/news/ethereum-max-cryptocurrency-kim-kardashian183000313.html? [https://perma.cc/9B4H-678H]. Even though Kardashian ended this post with #ad, she was charged by the Securities and Exchange Commission (“SEC”).5Id. In Part II, this Article discusses the case against Kim Kardashian and the new marketing rule which took effect in November 2022. Part III examines the importance of disclosures and why further regulation of cryptocurrency is needed.

II. Background

On October 3, 2022, Kim Kardashian settled with the SEC,  agreeing to pay $1.26 million in penalties after she was charged by the SEC for unlawfully touting crypto security on social media.6SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security, U.S. Sec. and Exch. Comm’n (Oct. 3, 2022), https://www.sec.gov/news/press-release/2022-183 [https://perma.cc/2VT6-66DZ]. Kardashian promoted EthereumMax, a cryptocurrency, on her Instagram account by linking EtherreumMax’s website promoting EMAX tokens.7Id.  Kardashian violated the anti-touting provision of federal securities law when she failed to disclose that EthereumMax paid her $250,000 for the Instagram post.8Id.

While the SEC has begun strictly enforcing regulations on celebrities and influencers who are being paid for endorsements, the SEC’s new marketing rule went into effect on November 4, 2022.9Clara Hudson, SEC’s Kardashian Case, Marketing Rule Aim to Reveal Paid Ads, Bloomberg L. (Oct. 7, 2022, 1:06 PM), https://www.bloomberglaw.com/product/blaw/bloomberglawnews/bloomberg-law-news/X8VT60JO000000? [https://perma.cc/UAZ4-E4E4]. The marketing rule was first approved by the SEC in December 2020 and effective on May 4, 2021.10Harriet Christie, The SEC’s New Marketing Rule Explained, Wealth Mgmt. (Sept. 22, 2022), https://www.wealthmanagement.com/regulation-compliance/secs-new-marketing-rule-explained [https://perma.cc/YQ8B-R9L4]. However, investment advisors had until November 4, 2022 to transition into compliance with the new regulations.11Id.

One of the biggest updates in the new marketing rule is the SEC’s definition of “advertising.”12Christie, supra note 10. Now, an advertisement “includes any direct or indirect communication an investment advisor makes that: offers its services regarding securities to existing or prospective clients; or includes any endorsement or testimonial for which an advisor provides cash or noncash compensation.”13Id. This definition now targets electronic communications, which allows online platforms to be regulated.14Id. The definition also specifically targets endorsements and testimonials on social media platforms, since advertisements and testimonials have proliferated on social media platforms.15Id. Investment advisors have the burden of managing influencers to ensure they comply with the marketing rule.16Id. Advisors must also sign a written agreement with the influencers they choose to promote their product.17Id.

Further, the new rule added new prohibitions.18Id. The rules prohibit investment advisors from circulating any advertisement that:

    1. Includes untrue statements and omissions;
    2. Includes unsubstantiated material statements of fact;
    3. Includes untrue or misleading implications or inferences;
    4. Fails to provide fair and balanced treatment of material risks or material limitations;
    5. Fails to present specific investment advice in a fair and balanced manner;
    6. Cherry-picks performance results or otherwise presents performance in a manner that is not fair and balanced; or
    7. Is materially misleading.19Id.

III. Discussion

When Kim promoted Etherum on Instagram, she most likely thought she was correctly disclosing the advertisement by adding #ad.20Disclosures 101 for Social Media Influencers, Fed. Trade Comm’n, https://www.ftc.gov/business-guidance/resources/disclosures-101-social-media-influencers [https://perma.cc/9QN5-U4Q2] (last visited Oct.17, 2022). The Federal Trade Commission (“FTC”) regulates advertisements on platforms like Instagram.21Id. To make the regulations accessible for influencers, the FTC published on its website a “Disclosures 101 for Social Media Influencers.”22Id. The FTC requires influencers who have a “material connection” with a brand to disclose that it is an endorsement.23Id.

Before the SEC’s new marketing rule was introduced, investment advisors were prohibited from using testimonials and endorsements.24Hudson, supra note 9. While the new rule allows for endorsements through social media platforms, it also requires disclosures.25Id. Disclosures are important for all consumers in the advertising world, and those consumers include potential investors through crypto.26Id. Attorney Eliza Fromberg talked about the importance of these disclosures by explaining, “people are likely to buy anything whether it’s a car or sneakers or a financial product upon the endorsement of a celebrity.”27Id.

Politicians and regulators have promoted more regulation for cryptocurrency since there are very few formal regulations affecting cryptocurrency.28Id. However, one critical question that remains unanswered about cryptocurrency is whether cryptocurrency is a security.29Wayne Duggan, Crypto Regulation: Is Cryptocurrency A Security? Forbes (Oct. 7, 2022, 12:02 PM), https://www.forbes.com/advisor/investing/sec-crypto-regulation/ [https://perma.cc/5WXL-J2PL]. The SEC believes that cryptocurrency is a security, which is why it has taken steps to enforce cryptocurrency regulations. Along with the SEC, the Commodity Futures Trading Commission (“CFTC”) and the Department of Justice have taken steps to regulate cryptocurrency.30Id. While the SEC is strictly enforcing regulations on celebrities and influencers for disclosures, the SEC has also charged various companies.31Id. For example, the SEC alleges that Ripple, who has the cryptocurrency XRP, “raised over $1.3 billion through an unregistered, ongoing digital assets securities offering.”32Id.

There should be more state and federal regulations regarding cryptocurrency.33Kevin Warbach, Why the U.S. Government Should Regulate Cryptocurrency, Knowledge at Wharton, (Mar. 28, 2022) https://knowledge.wharton.upenn.edu/article/why-the-u-s-government-should-regulate-cryptocurrency/ [https://perma.cc/4UDU-2W5K]. The main goal for regulation should be to protect consumers and investors.34Id. With one in five adults having invested in cryptocurrency, it is becoming more and more popular, especially among young people.35Aaron Klein, The Future of Crypto Regulation: Highlights from the Brookings Event, Brookings (Aug. 11, 2022), https://www.brookings.edu/2022/08/11/the-future-of-crypto-regulation-highlights-from-the-brookings-event/ [https://perma.cc/QT5U-RF2E]. While some may see regulation as a bad thing, experts say it may not be bad for investors.36Duggan, supra note 29. Bobby Ong, co-founder and COO of CoinGecko, explained that “having cryptocurrency regulations in place would mean that projects, exchanges, and all cryptocurrency-related businesses are held to a higher standard and as such, are beneficial to investors.”37Id. These regulations would protect and educate young people on the implications of investing in cryptocurrency.38Marisa Dellato, Crypto’s Super User: Young Men. 43% of U.S. Males Aged 18 to 29 Have Bought the Currency, Forbes (Apr. 21, 2022, 8:18 AM), https://www.forbes.com/sites/marisadellatto/2021/11/11/cryptos-super-user-young-men-43-of-us-males-aged-18-to-29-have-bought-the-currency/?sh=33b44658349a [https://perma.cc/Z9MB-HYCP].

IV. Conclusion

With celebrities and influencers promoting all kinds of brands and products, cryptocurrency has now made its way to social media endorsements. The SEC’s new marketing rule aims to protect some investors by requiring influencers to disclose they are being paid for an advertisement. However, more regulation is needed. When an influencer promotes cryptocurrency, many people, especially young people, will jump into investing money without knowing the true consequences and implications of their actions. With more regulation, investors will be better protected, and businesses will be held to a higher standard.


Cover Photo by Kanchanara on Unsplash

Author

  • Prior to law school, Caroline Hardig attended the University of Kentucky where she received a degree in Psychology and a minor in Spanish. Caroline is unsure of exactly what area of law she wants to practice, so she is excited to explore various topics in the law as an Associate Member.

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