The Influencers: The SEC Grounds Stars' TRX
Supposedly, Kylie Jenner charges almost $2 million to post about a product on social media. Why? Because she is the top celebrity/influencer. Some influencers are influencers because they are celebrities, and some are celebrities because they are influencers—and it’s becoming hard to keep them straight. Often, the entire influencer business seems just a way for boomers like me to poke fun at yet another newly invented but ultimately useless job. But influencers have become, well, influential, and nowhere more so than in that corner of the securities universe where cryptosecurities and their promoters abide.
To the SEC, tweet-outs of securities, especially new-fangled coins and tokens, are a two-fold problem. The first is that with so many coins to choose from, having yours mentioned by someone with a lot of followers really does make them more salable, which is exactly what the SEC is supposed to regulate. The second is that the operative law is Section 17 of the Securities Act of 1933, and 1933 was 90 years ago.
Section 17(b) says:
It shall be unlawful for any person . . . to publish, give publicity to, or circulate any . . . communication which . . . describes [a] security for a consideration . . . without fully disclosing the receipt . . . of such consideration and the amount thereof.
As is true of many modern things, mentioning a coin in a tweet doesn’t quite fit the 1933-plain-English meaning of “to give publicity to a communication which describes” that coin. In recent cases the SEC has staked out its position that mentioning a security in a tweet is enough to charge you under section 17(b) even if your tweet does not give publicity to any communication that describes much if anything about the security. In other words, if you get paid for name-dropping a security, then you have to disclose how much you're getting paid.
Although this seems a stretch, it's not necessarily a bad thing because influencers play an outsized role in popularizing coins and tokens. There do exist whitepapers and the like that “describe” cryptosecurities, but most of those are unreadable. For that matter, so are most prospectuses and private placement memoranda of the conventional type. But the securities laws still stand on the assumption that investors will read the relevant disclosure documents before buying securities. The law doesn’t assume that investors will buy something they don’t understand simply because some famous person who may understand it even less mentions it in a passing tweet.
The rise of influencers in the sale of securities, like the advent of cryptosecurities themselves, is a new thing. The SEC began focusing on it in 2017, first with its 21(a) Report on The DAO, and later that year with its warnings about celebrity-endorsed coin sales. https://www.sec.gov/litigation/investreport/34-81207.pdf; https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/investor-22. The SEC started bringing actions against various cryptosecurities operators shortly thereafter.
The latest flurry of SEC charges involved an outfit called The Tron Foundation and a couple of coins, one of which goes by the name of Tronix, or TRX. A few days ago the Commission started one federal court civil action against Justin Sun, the founder of Tron, and a two celebrity influencers, and settled administrative cases with half dozen other celebrity influencers. All those celebrity influencers were paid to name-drop TRX on Twitter, and they did.
The influencers who settled included boxer Jake Paul, actor Lindsay Lohan, musicians Akon, Lil Yachty and Ne Yo, and porn star Kendra Lust. Amongst them, they had over 30 million Twitter followers and they were paid an aggregate of $100,000. They settled by paying back to the SEC a total of $400,000. Not the best deal any of them ever made, but modest enough that avoiding further hassles was worth it. Sun and two other influencers, pop singer Austin Mahone and rapper Soulja Boy, held out and were sued in federal court. For those who want all the details, the cases can be found here:
https://www.sec.gov/litigation/admin/2023/33-11175.pdf (McCollum/ Lil Yachty)
https://www.sec.gov/litigation/admin/2023/33-11174.pdf (Mason/Kendra Lust)
Much of the substance of these cases is not news. Sun and his Tron enterprises are charged with selling unregistered securities, of fraudulent sales practices, of manipulating the market with self-dealing wash sales to make it appear TRX was more active than it was. The celebrity influencers did indeed tweet about TRX and none of them disclosed they were getting paid for it.
The only piece of this puzzle that’s open to question is whether any of those tweets were giving “publicity to a communication which describes” TRX. Consider that Jake Paul tweeted “$TRX [rocket emoji]” followed by a Twitter notice, “This Tweet was deleted by the Tweet author.” Where’s the communication? Where’s the description? Or Akon’s “hearing a lot about $TRX. @justinsuntron hit me up.” Or Lil Yachty’s “Getting a $TRX tattoo when it hits 50 cents.” Or, not to be outdone, Austin Mahone’s “when $TRX hits 50 cents I’m getting a tattoo of @justinsuntron’s face.” Probably the closest to a description was Kendra Lust’s “people should use only $TRX cause it’s fast, cheap and hot . . . even PornHub likes it.” OK, it does suggest a use case, but I still don’t know what the damn thing is, and none of these tweets tells me or points me where I can find out.
Much as I empathize with the SEC’s dilemma—of course those tweets helped to sell TRX—I still am troubled by the attempt here to skirt the real problem through enforcement. The real problem is that the Securities Act needs to be amended to deal with modern forms of securities and modern ways to sell them. Section 17(b) simply does not fit the realities of the Twitterverse, and the SEC is out on a limb in trying to make it do so through enforcement actions.
Of course, creeping out on the limbs of its regulatory tree is not new SEC behavior. It almost has to so long as Congress is dysfunctional, and it more often than not gets away with it. Note, for example, the administrative actions that the six settling celebrity influencers were charged in. The Commission had to start a federal lawsuit against Austin Mahone and Soulja Boy because that’s the only place it can act against persons who are not under its regulatory jurisdiction. None of those settling influencers could have been forced to appear in an SEC administrative process. They all necessarily volunteered to be there, no doubt as a condition to settling. Influencers come in all forms.
ABOUT THE AUTHOR
Aegis Frumento co-heads the Financial Markets Practice of Stern Tannenbaum & Bell, New York City. He represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations). He has decades of experience representing SEC, CFTC and FINRA regulated firms and persons in regulatory enforcement investigations, hearings and lawsuits. Drawing on his five years managing the Executive Financial Services Department of Morgan Stanley Smith Barney, Aegis has more experience than most in the securities and corporate governance laws affecting senior executives of public corporations. When not litigating, Aegis enjoys working with new and existing broker-dealers, registered investment advisers, and private equity funds, covering all legal aspects from formation to capital raising. Those clients now include pre-IPO funds, fintech firms, and industry professionals looking to adapt blockchain technologies to finance and financial market enterprises, including the use of cryptosecurities to represent equity and debt interests.
Aegis's long and distinguished career includes having been a Managing Director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP. He graduated from Harvard College in 1976 and New York University School of Law in 1979. Aegis is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments. He is a Fellow of the American Bar Foundation, rated A-V Preeminent by Martindale-Hubbell, named a New York Metro Area “Super Lawyer,” the current Chairman of the New York City Bar Association's standing Committee on Professional Responsibility, and most recently a Founding Member of the Financial Professionals Coalition.
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