(Bloomberg) -- Celebrities looking to make a quick buck shilling cryptocurrencies got a reminder Monday that regulators are watching.
The message came from the Securities and Exchange Commission, which announced that Kim Kardashian will pay $1.26 million to settle allegations that she broke US rules by promoting a crypto token on her Instagram, without disclosing to her followers that she was paid $250,000 to pitch it.
Kardashian is one of many high-profile celebrities — from Justin Bieber and Madonna to Reese Witherspoon, Paris Hilton and Tom Brady — who touted various digital assets in recent years, and in some cases sent their prices soaring. But the famous promoters have a spotty record when it comes to investments, sometimes pushing fans into tokens that left them with losses.
By going after Kardashian, the SEC signaled that it’s keeping an eye on the crypto industry, even as regulators struggle with broader questions around how to police digital tokens and whether or not they should be treated as securities.
“Are other celebrities quaking in their boots right now? Absolutely,” said John Reed Stark, former chief of the SEC Office of Internet Enforcement. “This message is intended to really stop these sort of shenanigans dead in their tracks.”
Kardashian didn’t admit or deny the SEC’s allegations as part of the settlement, in which she agreed not to tout any digital assets for three years. She “fully cooperated with the SEC from the very beginning and she remains willing to do whatever she can to assist the SEC in this matter,” said Patrick Gibbs, a partner at the law firm Cooley who is representing Kardashian.
The enforcement action isn’t the first time the SEC has chastised celebrities for hyping up digital assets without failing to disclose they’d been paid for the endorsements. The regulator has fined boxer Floyd Mayweather, music producer DJ Khaled, and actor Steven Seagal for similar activities. But the penalty against Kardashian is by far the largest to date — signaling that the SEC is getting more serious about cracking down.
“The SEC has and will continue to aggressively look at how celebrities and social media influencers use their public profiles to encourage Main Street America to invest in crypto asset securities,” said Christian Schultz, a partner at Arnold & Porter who previously worked in the SEC’s enforcement division.
SEC Chair Gary Gensler has ramped up crypto-related enforcement — repeatedly saying that he’s going to go after activities that violate the agency’s rules. In particular, he’s said many digital assets are likely securities and platforms that allow US investors to trade them should register with his agency.
For nonfungible tokens, an area with a a lot of celebrity endorsements, the situation remains less certain. A key legal question is whether NFTs are considered securities, and therefore subject to the same rules as stocks.
In March, Bloomberg News reported that attorneys at the SEC had sent subpoenas demanding information about certain token offerings as part of a larger effort to scrutinize creators of NFTs and crypto exchanges. But regulators have yet to disclose a case in which they have categorized NFTs as such, according to Stark.
Today @SECGov, we charged Kim Kardashian for unlawfully touting a crypto security.— Gary Gensler (@GaryGensler) October 3, 2022
This case is a reminder that, when celebrities / influencers endorse investment opps, including crypto asset securities, it doesn’t mean those investment products are right for all investors.
As the crypto market peaked last year, celebrities made a swift march into NFTs. Back in February, Paris Hilton showed off her new Bored Ape Yacht Club NFT during an appearance at the Tonight Show with Jimmy Fallon. Justin Bieber also joined the Bored Ape back in January, after purchasing an NFT for 500 Ethereum, raising questions about his involvement in an undisclosed endorsement deal.
Wall Street’s main regulator has long asserted that many virtual tokens are securities and under its jurisdiction. In Kardashian’s case, she included “#AD” at the bottom of a social media post in 2021, but never made investors aware she was being paid, according to the SEC.
“This shows the SEC as the influencer by going after a particularly high-profile target to deliver its message,” said Stephen Crimmins, a partner at Davis Wright Tremaine LLP and former SEC enforcement lawyer. A million dollar penalty for a $250,000 payment “signals the SEC is ramping up enforcement in the crypto space.”
--With assistance from Matt Robinson.