How NOT to Promote Your NFT or Metaverse Project: Part 3

Don’t Skip Proper Disclosures

In the wake of the SEC’s settlement with Kim Kardashian, it’s more important than ever to ensure that Web3, NFT & Metaverse project founders – as well as influencers hired to help promote those projects – make all legally-required disclosures. Here’s why…

On October 3, 2022, the U.S. Securities and Exchange Commission (“SEC”) announced charges against Kim Kardashian for “touting on social media a crypto asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion.” In particular, the SEC’s order found that Kardashian “failed to disclose that she was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax.“

This action isn’t the first brought by the SEC against prominent social media influencers, but it is definitely the one that has gotten the most attention because, well, Kardashian.

The SEC determined that Ms. (I think it’s still Ms. but I can’t keep up) Kardashian violated Section 17(b) of the Securities Act, which makes it unlawful for any person to:

[P]ublish, give publicity to, or circulate any … communication which … describes [a] security for a consideration received or to be received … without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.

15 U.S. Code § 77q

Two things worth mentioning here:

1. The Act in question only applies to “securities,” but…

Although Section 17(b) of the Securities Act only applies to “securities,” celebrities & other promoters should not rely on an issuer’s statement (even if it’s supported by a legal opinion) that a token is not a security and therefore conclude disclosure is not required. If the SEC concludes that the offer and sale of a project’s tokens involve a crypto asset security offering (as it did with EthereumMax), and those tokens are offered or sold to anyone in the U.S., then any promoters who receive any form of compensation will be held to the same standard as Kim Kardashian.

2. The Act does *not* prohibit promotion

As stated in Section 17(b) of the Securities Act, it is only unlawful to promote a covered offering if you fail to make the proper disclosures. The SEC has provided the following guidance in this regard:

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.

In summary, whether you are a Web3, NFT or Metaverse project founder that involves digital assets or a promoter or influencer that has been hired to promote one of these projects, you should always make the following disclosures to be safe:

👏 nature;
👏 scope; and
👏 amount of compensation.

Final Note: In addition to the securities laws, the U.S. Federal Trade Commission has released guidance on influencer marketing in general, which would apply to all promotions of Web3, NFT or Metaverse projects, but that will have to wait until Part 4.

Until next time. 🫡

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