The Securities and Exchange Commission (SEC) has recently announced charges against several celebrities for illegally promoting cryptocurrencies without disclosing their compensation. The charges are part of a broader enforcement action against crypto entrepreneur Justin Sun and his companies, Tron Foundation Limited, BitTorrent Foundation Ltd. and Rainberry Inc., for fraud and securities violations.
Who are the celebrities involved?
The SEC named eight celebrities who allegedly touted Tronix (TRX) and/or BitTorrent (BTT) tokens on social media platforms such as Twitter, Instagram and YouTube. They are:
- Lindsay Lohan, actor
- Jake Paul, YouTuber
- Aliaune Thiam (Akon), musician
- DeAndre Cortez Way (Soulja Boy), musician
- Austin Mahone, musician
- Miles Parks McCollum (Lil Yachty), musician
- Shaffer Smith (Ne-Yo), musician
- Michele Mason (Kendra Lust), adult film performer
According to the SEC’s complaint, these celebrities received payments ranging from $5,000 to $50,000 for their endorsements, but failed to disclose that fact and the amount of their compensation to their followers. This violated Section 17(b) of the Securities Act of 1933, which requires anyone who promotes securities for money to disclose that they are being paid and how much.
What did Justin Sun do wrong?
Justin Sun is the founder of Tron Foundation Limited and BitTorrent Foundation Ltd., which issued TRX and BTT tokens respectively. He is also the CEO of Rainberry Inc., formerly known as BitTorrent Inc., which acquired BitTorrent in 2018.
The SEC alleges that Sun and his companies engaged in multiple illegal activities involving TRX and BTT tokens, such as:
- Offering and selling them as investments through unregistered “bounty programs” that rewarded participants for promoting the tokens on social media, joining Telegram and Discord channels, and creating BitTorrent accounts.
- Manipulating the market prices of TRX and BTT through extensive wash trading, which is a form of market abuse that involves buying and selling securities simultaneously to create artificial trading volume.
- Orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation, as discussed above.
The SEC claims that these actions violated Section 5 of the Securities Act of 1933, which requires all nonexempt securities to be registered with the SEC before they can be offered or sold to investors.
What are the consequences?
The SEC has filed its complaint against Sun and his companies in U.S. District Court for Southern New York, seeking permanent injunctions, disgorgement of ill-gotten gains plus interest, civil penalties, officer-and-director bars against Sun, penny stock bars against Sun’s companies, rescission offers by Sun’s companies for investors who purchased TRX or BTT through bounty programs or celebrity endorsements without proper disclosure.
Meanwhile, most of the celebrities involved have agreed to settle with the SEC without admitting or denying its findings. They have consented to pay over $400,000 in total penalties and interest. The only exceptions are Soulja Boy and Mahone, who have not yet reached a settlement with the SEC.
Implications for crypto investors?
This case highlights some of the risks associated with investing in cryptocurrencies or other digital assets that may be subject to securities laws.
Investors should be wary of any promotional materials that do not clearly disclose whether they are paid advertisements or unbiased opinions. Investors should also do their own research before buying any tokens or coins based on hype or celebrity endorsements.
The SEC has been actively pursuing cases involving crypto-related frauds and violations since 2017. It has issued several guidance documents on how it applies existing securities laws to digital assets.
It has also created a Cyber Unit within its Enforcement Division to focus on cyber-related misconduct involving distributed ledger technology (DLT) such as blockchain.
