Kim Kardashian fined US$1.26m for failing to disclose Instagram crypto ads

Kim Kardashian has been charged by the US Securities and Exchange Commission (SEC) for touting on social media a crypto asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion. Kardashian (pictured) will pay US$1.26 million in penalties, disgorgement, and interest, and cooperate with the Commission’s ongoing investigation. She also agreed to not promote any crypto asset securities for three years.

According to the SEC, Kardashian failed to disclose that she was paid US$250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax. Her post contained a link to the EthereumMax website, which provided instructions for potential investors to purchase EMAX tokens.

In doing so, Kardashian violated the anti-touting provision of the federal securities laws. The US$1.26 million includes approximately US$260,000 in disgorgement, which represents Kardashian's promotional payment, plus prejudgment interest, and a US$1,000,000 penalty. Kardashian neither admitted nor denied SEC's findings. 

Federal securities laws in the US state 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. Gurbir Grewal, director of the SEC's Division of Enforcement, added that investors are entitled to know whether the publicity of a security is unbiased.

The post that landed Kardashian in hot soup

On 13 June 2021, Kardashian promoted EthereumMax's offering on social media by sharing an Instagram Story along with an introductory video stating she had a "big announcement", according to the lawsuit against Kardashian seen by MARKETING-INTERACTIVE.

The post contained a link to the EthereumMax website, where instructions were provided for potential investors to purchase EthereumMax tokens. She also included #Ad at the bottom of the post. At the time of her promotion, Kardashian had about 225 million Instagram followers.

Her crypto asset security promotion came a few years after the SEC warned in 2017 that digital tokens or coins offered and sold may be securities, and those who offer and sell securities in the US must comply with the federal securities laws. The promotion also occurred nearly four years after the SEC's Division of Enforcement and Office of Compliance Inspections and Examinations issued a statement saying: "Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion. A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws."

The SEC also previously warned investors that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion. "Investment decisions should not be based solely on an endorsement by a promoter or other individual. Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities law," the SEC said.

Last May, EthereumMax made the EMAX tokens available for public trading on a decentralised crypto asset trading platform. Based on EthereumMax’s marketing materials, as well as public statements by EthereumMax affiliates, the EtherumMax website, and EthereumMax social media handles, the lawsuit said purchasers of EMAX tokens would have had a reasonable expectation of profits from their investment in the tokens.

EthereumMax frequently touted the token’s rise in price on its social media pages as it offered and sold EMAX tokens. Based on EthereumMax’s public statements, purchasers of the EMAX tokens would have had a reasonable expectation that EthereumMax and its agents would expend significant efforts to develop the EthereumMax platform, which would increase the value of their EMAX tokens, resulting in investor profit.

The lawsuit added that EthereumMax’s marketing materials highlighted that the company and its agents would ensure a secondary trading market for EMAX tokens by creating a trading market for EMAX tokens. EthereumMax’s marketing materials were also said to emphasise the purported expertise of the company’s management. Also, EthereumMax’s marketing materials contained numerous direct statements that the EMAX tokens would rise in value as a result of the efforts of the company and its agents, including by touting future deals and relationships that would “drive value.”

EthereumMax also promised to develop certain “token enhancements,” including “additional tokenomics to enhance economic value,” future rewards and staking programmes, national sporting and event partnerships, and a general expansion of the EMAX token ecosystem.

According to CNBC in January this year, EthereumMax has lost around 97% of its value since early June 2021. This resulted in some investors calling it a "pump and dump" scheme, where scammers seek to increase the price of an asset through false or misleading statements. American boxer Floyd Mayweather, who endorsed EthereumMax in his boxing match, was also sued in January over claims that he mislead investors.

The SEC is not the only one to be keeping a close eye on crypto. In August, the Monetary Authority of Singapore's (MAS) MD Ravi Menon said it is contemplating adding restrictions on retail access to cryptocurrencies. MAS is also currently considering further measures to reduce consumer harm after consumers are still enticed by the prospect of sharp price increases in cryptocurrencies, which Menon said are "actively traded and heavily speculated upon".

According to Menon, consumers seem to be "irrationally oblivious about the risks of cryptocurrency trading" and consumer-related risks have also gained the attention of regulators globally. "MAS regards cryptocurrencies as unsuitable for use as money and as highly hazardous for retail investors," he said. Among the list of further measures include customer suitability tests and restricting the use of leverage and credit facilities for cryptocurrency trading.

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