The SEC spread its reach to Hollywood this month – on October 3, 2022, the SEC announced charges against Kim Kardashian for her social media promotions of EMAX, a digital token issued by EthereumMax. The SEC found that Kardashian violated the anti-touting provision of the federal securities laws by failing to disclose the $250,000 payment she received for the ad.
In a press release, the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, said “The federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion.”
In a case that moved somewhat swiftly, without admitting or denying the charges, Kardashian agreed to settle with the SEC by paying pay $1.26 million, consisting of a million-dollar penalty, and $260,000 in disgorgement and pre-judgment interest, along with a promise to cooperate with the SEC investigation going forward. It begs the question: why did Kim apparently capitulate? There are a number of potential explanations:
- Cases brought by the SEC are no joke, and very different from a civil lawsuit that Kardashian may have the resources to slow roll.
- Kardashian respects the law. As an aspiring lawyer, Kardashian knows the gravity of having the SEC bring civil charges under the federal securities laws. Not only would Kim have to report the charges to the Character and Fitness Committee, but any failure to carry out the terms of the settlement may complicate whether she could practice law at all.
- As a recent co-founder of private equity firm Skky Partners, this incident might impact her ability to find investors or raise capital in her new venture. Paying the penalty may be Kardashian’s way of putting any negative press behind her as she starts her new firm.
There are many lessons here. Not the least important is that it is “never a good idea to make an investment decision just because someone famous says a product or service is a good investment.” Those investing based on promotions should make sure the person promoting the security is registered or licensed on investor.gov. The same advice goes to issuers that are looking to have someone promote their security – make sure your promoter includes a disclaimer in accordance with the anti-touting disclosure requirements. To be extra safe, provide links to the SEC EDGAR database so that investors can easily access relevant information.
The SEC has noted that it will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws going forward. Kardashian may be off the hook for now, but it’s only a matter of time before another celebrity or influencer stumbles into the ever-evolving minefield of securities regulation.