Coin offerings using celebrity glitter may not be golden, SEC warns

Jonathan Shieber
The Securities and Exchange Commission has issued a stern warning to the celebrities, athletes and social media stars pitching investment opportunities in virtual currencies.

The Securities and Exchange Commission has issued a stern warning to the celebrities, athletes and social media stars pitching investment opportunities in virtual currencies.

A slew of media stars -- including the massively popular musician DJ Khaled, the boxer Floyd Mayweather and socialite Paris Hilton -- have hitched their stars to various virtual currencies, lending their social media outreach and luster to projects that have seemed less than golden.

Now, the SEC's Enforcement Division and Office of Compliance Inspections and Examinations is bringing down the hammer, warning celebrities that their endorsements "may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement."

For the past year, as money invested in new virtual currency offerings has skyrocketed to more than $2 billion, regulators have been struggling to catch up.

For now, as the offerings continue to operate in a nebulous legal space, the SEC is resorting to a very old adage in its communications with potential ICO investors.

"The SEC’s Enforcement Division and Office of Compliance Inspections and Examinations encourage investors to be wary of investment opportunities that sound too good to be true. We encourage investors to research potential investments rather than rely on paid endorsements from artists, sports figures, or other icons," the agency warned today.

As for the celebrities themselves, if they're found pitching products that the SEC ultimately deems are securities under U.S. law, they can be held liable under anti-touting and anti-fraud provisions of federal securities laws.

"Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers. The SEC will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws," the agency warned.

All of this federal attention may have been inspired in part by the amazing reporting from The New York Times and its resident bitcoin expert, Nathaniel Popper, that came out this weekend. The piece includes two of my favorite written paragraphs of recent memory (included below, but you should read the whole thing in its entirety):

The... endorsement of Centra, along with a similar endorsement from the popular rapper DJ Khaled, lent a patina of credibility to a project that has ended up with more than a few problems, including a chief executive who does not appear to have been a real person and a shaky, fast-shifting business plan.

Thanks in part to the endorsements, in just a few weeks Centra’s founders raised over $30 million from investors around the world. They finished their fund-raising this month, just before a grand jury indicted two of the three co-founders on perjury charges stemming from a drunken-driving case.

Holy wow... that's amazing.

The SEC is so concerned about potential investors falling for this stuff that they've actually issued a warning letter with some advice that is... in a word... choice.

I'm including it below, too, because it's great:

Celebrities, from movie stars to professional athletes, can be found on TV, radio, and social media endorsing a wide variety of products and services – sometimes even including investment opportunities.  But a celebrity endorsement does not mean that an investment is legitimate or that it is appropriate for all investors.  It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.

Celebrities, like anyone else, can be lured into participating (even unknowingly) in a fraudulent scheme. Also, celebrities are sometimes linked to products or services without their consent so the celebrity may not even have endorsed the investment.

Even if the celebrity endorsement and the investment opportunity are genuine, the investment may not be a good one for you. Before investing, always do your research, including these three steps:

  • Check out the background, including registration or license status, of anyone recommending or selling an investment through the SEC’s Investment Adviser Public Disclosure (IAPD) database, available on Investor.gov;
  • Learn about the company’s finances, organization, and business prospects by carefully reading any prospectus and the company’s latest financial reports, which may be available through the SEC’s EDGAR database; and
  • Consider the investment’s potential costs and fees, risks, and benefits in light of your own investment goals, risk tolerance, investment horizon, net worth, existing investments and assets, debt, and tax considerations.

Never make an investment decision based solely on a celebrity endorsement, or other information you receive through social media, investment newsletters, online advertisements, email, investment research websites, internet chat rooms, direct mail, newspapers, magazines, television, or radio.