In recent years, cryptocurrency has become a popular investment option for people from all walks of life, including but not limited to teenagers, adults, and celebrities. With the advent of digital assets and blockchain technology, many celebrities are finding success investing in and promoting various cryptocurrencies. However, the Securities and Exchange Commission (SEC) has recently begun cracking down on cryptocurrencies, issuing warnings and fines to those who fail to comply.
The SEC requires companies and individuals offering investments to register with the agency or qualify for an exemption. This includes celebrities promoting cryptocurrency investments on social media or other platforms. The SEC has taken a closer look at these promotions, particularly those that could be considered misleading or deceptive to potential investors.
A notable case involves boxer Floyd Mayweather and music producer DJ Khaled, who were fined by the SEC in 2018 for sponsoring an initial coin offering (ICO) for a cryptocurrency called Centra. The SEC noted that the two celebrities did not disclose that they were paid to promote the ICO and that their endorsements may have led investors to believe that the cryptocurrency was a sound investment.
More recently, the SEC has scrutinized social media posts by celebrities promoting cryptocurrencies, particularly non-fungible tokens (NFTs). NFTs are digital assets that are unique and non-replicable and are becoming increasingly popular in the arts and entertainment world. However, the SEC has warned that some NFTs could be considered securities, which would require registration with the agency or an exemption.
On March 22, 2023, the SEC announced indictments against crypto-asset entrepreneur Justin Sun and three of his wholly owned companies, Tron Foundation Limited, BitTorrent Foundation Ltd. and Rainberry Inc., for the unregistered offering and sale of crypto-asset securities Tronix (TRX) and BitTorrent (BTT). This is big news as the SEC has simultaneously indicted several celebrities for illegally promoting TRX and/or BTT without disclosing that they have been compensated. This list includes names like Lindsay Lohan, Soulja Boy, Jake Paul, Lil Yachty, and Akon to name a few.
The SEC’s complaint alleges that TRX and BTT were sold as investments through so-called “bounty programs,” in which interested consumers promoted the tokens on social media and then recruited others for the Tron-connected Telegram and Discord channels , which in turn created BitTorrent accounts in exchange for TRX and BTT. The complaint further alleges that Sun, BitTorrent Foundation and Rainberry have been offering and selling BTT in unregistered monthly airdrops to investors who bought TRX in Tron wallets or on other crypto holding platforms (Coinbase, Blockchain, etc.) and have held. According to the complaint, all of these unregistered offers and sales violated Section 5 of the Securities Act.
The SEC has also stated that Sun violated the anti-fraud and market manipulation provisions of federal securities laws by conducting an operation to artificially inflate the value of TRX. From at least April 2018 to February 2019, Sun allegedly directed its employees to sell and buy TRX between two crypto asset trading platform accounts it controlled. This is known as “wash trading” and is a form of market manipulation. The SEC states that between 4.5 million and 7.4 million TRX were washed daily. The operation required a substantial supply of TRX, allegedly provided by Sun. The SEC has stated that Sun made $31 million from this illegal activity.
This drop, coupled with the volatility that the crypto market has seen over the past year, shows the risk someone is taking when investing in crypto. SEC Chairman Gary Gensler spoke about the deceptive practices of crypto companies when he said: “As claimed, Sun and its companies have not only targeted US investors with their unregistered offerings and sales, and millions in illicit proceeds at the expense of investors, but they also coordinated wash trading on an unregistered trading platform to give the misleading appearance of actively trading TRX. Sun also prompted investors to buy TRX and BTT by orchestrating an ad campaign in which he and his celebrity promoters hid the fact that the celebrities were being paid for their tweets.” These companies use celebrities that many people trust to target the uneducated Attracting crypto buyers and making money from market manipulation.
The bottom line of this story is – always do your research before investing in crypto. The market is still unregulated, and while that can be a plus, it opens the door for shady activity, as seen here. Also, take celebrity endorsements with a grain of salt, especially when dealing with crypto. Rug pulling schemes are becoming increasingly popular with big names as a way to make big bucks, and you don’t want to be on the wrong side of the computer screen in that regard.