Are you guys into crypto???? : Celebrities Promoting Cryptocurrencies Become Class Action Targets | Venable LLP

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A class action lawsuit filed against Kim Kardashian, Floyd Mayweather and former professional basketball player Paul Pierce earlier this month underscores the need for celebrities to be careful when addressing any endorsement activity in the crypto space. cash.

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 company tokens. The complaint alleges that the three influencers misleadingly promoted EMAX tokens to potential investors, touting investors’ ability to earn significant returns due to the favorable “tokenomics” of EMAX tokens, when in fact the chips were virtually worthless. The class action alleges violations of the California Unfair Competition Act, California Consumer Legal Remedies Act, Complicity and Unjust Enrichment/Disstitution.

According to the complaint, EthereumMax’s entire business model relies on marketing and promotion activities, and celebrity promoters received EMAX tokens and/or other compensation in exchange for promoting the tokens. (EthereumMax “has no connection” to Ether, the second-largest cryptocurrency, according to the lawsuit, adding that its brand 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, posting on social media, wearing EMAX-branded shirts, and promoting cryptocurrency at a conference.

Following recommendations from famous influencers, EMAX tokens are said to have increased by 1370% in value. However, shortly after reaching its highest price, the value collapsed by 98%. According to the complaint, the promotional activities generated the trading volume necessary for celebrity promoters to unload their EMAX tokens for substantial profits, leaving investors with a “virtually worthless digital asset” – in other words, a “pump -and-dump” classic. scheme.

Only Kardashian has disclosed receipt of any payment or consideration, making a small “#AD” disclosure in the bottom right of a June 2021 post to her more than 250 million followers. In a later speech, the head of the UK’s Financial Conduct Authority said the message “was perhaps the financial promotion with the biggest audience in history”.

In the past, famous promoters of cryptocurrency investments have also been targets of enforcement action by the Securities and Exchange Commission (SEC). In 2018, the SEC accused Mayweather and DJ Khaled of promoting initial coin offerings (ICOs) on social media without disclosing that the companies offering the titles were paying them for advertising. The SEC also indicted 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 similar cryptocurrency offers, exchanges and transactions should do their due diligence on the projects they support and ensure they comply with the requirements of the endorsement guides of the FTC, for example, by making the required clear and prominent disclosures of any compensation or other connection at the start or beginning of any social post.

Additionally, endorsers, whether famous or not, should check whether and/or how US securities laws will apply when discussing cryptocurrency online and on social media. As blockchain, cryptocurrency and NFT projects continue their immense growth and more and more celebrity promoters join these projects, the risks of class action lawsuits and regulatory enforcement are likely to increase alongside. to this growth.

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