The Securities and Exchange Commission warned Wednesday that celebrities and others are using social media networks to encourage the public to purchase stocks and other investments like initial coin offerings, and that these endorsements may be unlawful if the proper disclosures aren’t given.
The SEC’s Enforcement Division and Office of Compliance Inspections and Examinations encourage investors to be wary of investment opportunities that sound too good to be true.
“We encourage investors to research potential investments rather than rely on paid endorsements from artists, sports figures or other icons,” the SEC said.
Such endorsements, the agency stated, must disclose the nature, source and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.
The SEC did not name any individuals. But the actor Jamie Foxx and the boxer Floyd Mayweather are among celebrities that have promoted ICOs recently. In 2011, the rapper 50 Cent drew widespread attention for tweeting about the stock of a tech startup he owned, which subsequently rose and then crashed. The rapper wasn’t charged, presumably because he didn’t sell when the price soared, according to Fortune.
Also on Wednesday, the SEC’s Office of Investor Education issued an investor alert. A celebrity endorsement “does not mean that an investment is legitimate or that it is appropriate for all investors,” the alert states. “It is never a good idea to make an investment decision just because someone famous says a product or service is a good investment.”
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,” the SEC said. “A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.”
(Not all virtual tokens are securities.)
Celebrities who endorse an investment “often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws,” the agency warned.
Anyone making these endorsements may also be liable for potential violations of the antifraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.
“The SEC will continue to focus on these types of promotions to protect investors and to ensure compliance with the securities laws,” the securities regulator warned.
Investors should note that celebrity endorsements may appear unbiased, but instead may be part of a paid promotion.