Is The SEC Making an Example of Kim K?
In October 2022, Kim Kardashian settled with the Securities and Exchange Commission (“SEC”), over charges brought against her for violating federal securities laws in a paid promotion on social media.[1] Kim Kardashian posted a story on her Instagram account in June 2021 that promoted the digital token EthereumMax to her 328 million followers.[2] Kardashian claimed that this promotion was not “financial advice,”[3] but also provided a link with instructions on how to purchase EMAX tokens.[4] Her post also included the hashtag “ad,”[5] which is a minimum requirement laid out by the Federal Trade Commission (“FTC”) for regulation of paid social media promotions of goods and services by influencers.[6] Kim, and the other Kardashians, have avoided liability numerous times by using the hashtag “ad” on various paid promotional posts, after encountering issues with FTC regulation for not doing so in the past.[7]
This post was problematic, as tokens like EthereumMax, are considered securities and are regulated by the SEC, unlike goods and services, which are regulated by the FTC—prompting much stricter guidelines over concerns of investor protection.[8] In 2017, the SEC announced that tokens or virtual coins “may be securities” and anyone who promotes them in the United States must be in compliance with federal securities laws.[9] While celebrities promote goods and services on social media quite frequently, they do not commonly promote securities.[10] When it comes to crypto, celebrities have promoted crypto exchanges but not specific tokens like EthereumMax, which is likely to avoid regulation by the SEC.[11] According to SEC Chair Gary Gensler, celebrities are required to “disclose to the public when and how much they are paid to promote investing in securities.”[12] Further, the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, has stated that “federal securities laws are clear” and that anyone “who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion.”[13] Failure to disclose is not only a “violation of the anti-touting provisions of federal securities laws,” but individuals could 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.”[14] Thus, when Kim Kardashian failed to disclose that she was paid $250,000 for her promotion, she violated federal securities laws and is now facing the consequences.[15]
Kardashian’s settlement for violating federal securities laws did not include an admission of wrongdoing, but it did deliver a whopping $1.26 million in fees.[16] Broken down, this equates to $260,000 in disgorgement and interest, and a massive $1,000,000 penalty.[17] Kardashian’s settlement total is approximately five times the price she was paid for the promotion of EtheremMax on her Instagram.[18] The SEC also required that Kardashian comply with the ongoing investigation and agree to avoid promotion of crypto securities for three years.[19] The SEC has gone after celebrities in the past for similar behavior—but never quite to this extent.[20] For example, in 2018, the SEC went after Floyd Mayweather and DJ Khalid for the similar behavior of promoting ICOs and failing to disclose their payment.[21] Mayweather failed to disclose his $200,000 payment and was fined $614,775 by the SEC.[22] Likewise, DJ Khalid failed to disclose $150,000, and was fined $152,725 in fees by the SEC.[23] Similarly, in 2020, the SEC settled with Steven Seagal for failure to disclose payment for promotion of a crypto security.[24] Segal was paid $250,000 in cash and $750,000 in B2G tokens, but was only fined $157,000 by the SEC.[25] These three examples demonstrate that Kardashian’s settlement is a bit different.
Of course, there are now varying opinions regarding the implications of Kim K’s settlement with the SEC. Some venture to say that the SEC is trying to make an example of Kardashian with the excessive penalties she incurred.[26] In contrast, others suggest that the extreme penalty is only because of her high net worth and social media influence, and not a result of increased aggression from the SEC. While it is true that the SEC has gone after celebrities in the past for similar behavior, it has never quite reached this level.[27] Some critics find that Kardashian’s $1,260,000 penalty is not harsh enough—suggesting it was merely a slap on the wrist or a speed bump—but ultimately allowed her to move on with her other business ventures.[28] Regardless of the reasoning, it is obvious that a new precedent has been set by the SEC and celebrities and influencers should take note.
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