This article was previously published on Venable’s All About Advertising Law blog.
A class action lawsuit filed against Kim Kardashian, Floyd Mayweather, and former professional basketball player Paul Pierce earlier this month underscores the need for celebrity endorsers to take care when they approach any endorsement activity in the cryptocurrency space.
The lawsuit alleges that the celebrities collaborated with Ethereum Max, a company offering ERC-20 cryptocurrency tokens (EMAX Tokens), and its executives to engage in a “pump-and-dump” scheme promoting investments in the company’s tokens. The complaint alleges that the three celebrity influencers misleadingly promoted EMAX Tokens to potential investors, touting the ability of investors to make significant returns due to the favorable “tokenomics” of the EMAX Tokens, when in fact the tokens were practically worthless. The class action alleges violations of California’s Unfair Competition Law, California’s Consumers Legal Remedies Act, aiding and abetting, and unjust enrichment/restitution.
According to the complaint, EthereumMax’s entire business model relies on marketing and promotional activities, and the celebrity promoters received EMAX Tokens and/or other compensation in return for promoting the tokens. (EthereumMax “has no connection” to Ether, the second-largest cryptocurrency, the lawsuit said, adding that its branding appears to be an effort to mislead investors into believing the token is part of the Ethereum network.) The promotional activities at issue included, among other things, making social media posts, wearing EMAX-branded shirts, and promoting the cryptocurrency at a conference.
Following the celebrity influencers’ endorsements, EMAX Tokens reportedly rose by 1,370% in value. However, shortly after reaching its top price, the value crashed by 98%. According to the complaint, the promotional activities generated the trading volume needed for the celebrity promoters to offload their EMAX Tokens for substantial profits, leaving investors with a “practically worthless digital asset”—in other words, a classic “pump-and-dump” scheme.
Only Kardashian disclosed the receipt of any payment or consideration, making a small “#AD” disclosure in the bottom right of a June 2021 post to her 250+ million followers. In a subsequent speech, the head of the UK’s Financial Conduct Authority said the post “may have been the financial promotion with the single biggest audience reach in history.”
In the past, celebrity promoters of cryptocurrency investments have also been the target of enforcement actions by the Securities and Exchange Commission (SEC). In 2018, the SEC charged Mayweather and DJ Khaled for promoting Initial Coin Offerings (ICOs) on social media without disclosing that the companies offering the securities were compensating them for the publicity. The SEC also charged film producer Ryan Felton and rapper Clifford Harris, Jr. in September 2020 for promoting and participating in two unregistered and fraudulent ICOs.
Celebrities and others seeking to promote cryptocurrency offerings, exchanges, and similar transactions should do their due diligence on the projects they support and ensure they are complying with the requirements of the FTC’s Endorsement Guides, for example, by making the required clear and conspicuous disclosures of any compensation or other connection at the beginning of or early in any social post.
In addition, endorsers—whether celebrity or otherwise—should review whether and/or how U.S. securities laws will apply when discussing cryptocurrency online and on social media. As blockchain, cryptocurrency, and NFT projects continue their immense growth, and more celebrity promoters join these projects, class action and regulatory enforcement risks are likely to rise in tandem with this growth.