In the iconic words of DJ Khaled: “Another one.” That’s right, folks. Another round of celebrities have fallen on the wrong side of the federal government’s enforcement of its advertising disclosure rules. Recently, the SEC announced that it settled charges against Floyd Mayweather (professional boxer) and DJ Khaled (entertainer and music producer) for failing to tell their social media followers that they received money for promoting investments in Initial Coin Offerings (“ICOs”). This case is especially noteworthy, considering that this is the first time the SEC brought an action against a paid celebrity endorser involving ICOs.
In Mayweather’s case, he received a $300,000 payment for ICO tweets like this one: “starts in a few hours. Get yours before they sell out, I got mine…”
Likewise, DJ Khaled received a $50,000 payment for this tweet: “I just received my titanium centra debit card. The Centra Card & Centra Wallet app is the ultimate winner in Cryptocurrency debit cards powered by CTR tokens! Use your bitcoins, ethereum, and more cryptocurrencies in real time across the globe. This is a Game changer here. Get your CTR tokens now!”
In both instances, the celebrities failed to tell their followers that they received payments in exchange for their social media posts. Previously on the blog, we shared three golden rules that influencers must follow when promoting products or services:
- Golden Rule 1: influencers must disclose when they’ve received compensation or other benefits, such as free products or services;
- Golden Rule 2: necessary disclosures must be made clearly and conspicuously; and
- Golden Rule 3: general advertising and marketing principles apply to influencer marketing.
In the past, the FTC has actively focused on influencers who misled consumers by failing to disclose material connections between themselves and their advertising partners. As a reminder, the FTC defines a “material connection” as any business/family relationships, financial payments, or product gifts that an influencer receives that consumers wouldn’t necessarily expect the influencer to receive.
However, acts that are misleading in the FTC context can be deemed fraudulent in the SEC context when the paid endorsement is undisclosed and relates to a security. The SEC has urged celebrities to exercise caution when partnering with ICOs. Failure to disclose compensation for promoting securities violates Section 17(b) of the Securities Act.
Although the same principles underpin both the FTC’s and the SEC’s disclosure policies, influencers should note that, unlike the FTC—which has not yet imposed a monetary judgment on an influencer—the SEC will enforce steep financial penalties for securities fraud. For Mayweather and DJ Khaled, failing to disclose their payments cost them disgorgement, penalties, and interest payments. Mayweather has agreed to pay $614,775, and DJ Khaled will pay $152,725.
DJ Khaled may not always win no matter what. And Mayweather certainly can’t KO his way out of this situation. But if you want to be a champ and need additional information about complying with the SEC’s or the FTC’s influencer disclosure policies, the Venable Team is here to help.