Boxer Floyd Mayweather Jr. and music producer and rapper Khaled Khaled — better known as DJ Khaled — will each pay hundreds of thousands of dollars to settle federal allegations that they promoted new cryptocurrencies without disclosing that they were being paid by the currencies’ creators.
The Securities and Exchange Commission alleged both men violated a federal law that prohibits individuals from advertising investments without disclosing that they are being paid to do so.
Under settlements with the agency, announced at the same time the allegations were made public, the two men will each pay back all of the money they were paid by cryptocurrency issuers, plus penalties. Mayweather will pay a total of nearly $615,000; Khaled will pay about $153,000. Neither admitted wrongdoing.
The SEC said this was the first time it had gone after individuals for touting initial coin offerings, in which companies sell new cryptocurrencies. ICOs and cryptocurrencies — which have boomed and busted over the last year — have become a new focus for the agency as interest in virtual currencies has surged among individual investors and institutions alike.
Central to the SEC’s charges is the notion that the cryptocurrencies hawked by Khaled and Mayweather are not merely currencies but rather securities — more like shares of stock than dollars. The agency warned in a report last year that some currencies, sometimes called tokens, that are sold in ICOs could be deemed securities and therefore subject to federal securities laws.
The SEC accused both men of using their social media accounts last year to promote tokens issued by Centra Tech, a Miami company. The company raised $32 million by selling Centra tokens from July to October of last year.
Centra’s founders said they would use the money raised in the ICO to build several financial services products, including a debit card that would enable users to make purchases with various cryptocurrencies.
But the SEC cried foul. In April, it charged Centra Tech founders Sohrab “Sam” Sharma and Robert Farkas with securities fraud, alleging that they falsely claimed to have deals with Visa and Mastercard and that they created a fictional chief executive billed as an experienced businessman. The Department of Justice filed related criminal securities fraud charges against Sharma and Farkas.
Sharma and Farkas have pleaded not guilty to the criminal charges. The SEC’s civil case against them is on hold pending the conclusion of the criminal case.
The SEC said Centra paid Khaled $50,000 for a single post that appeared on Instagram and Twitter. The post included a picture of Khaled holding a Centra debit card, with a caption calling Centra “a game changer” and “the ultimate winner in cryptocurrency debit cards.”
The agency said Centra paid Mayweather $100,000 to promote its ICO in two posts, one that appeared on Instagram and Facebook and one that appeared on Twitter. The SEC also accused Mayweather of promoting two additional cryptocurrencies — neither of which it named — for $100,000 each.
In the charges against Khaled, Mayweather, Sharma and Farkas, the SEC contended that Centra tokens are securities. In its complaint against Sharma and Farkas, the agency noted that Centra told potential investors they could generate a profit by investing in the tokens.
The SEC said in a report last year that cryptocurrencies can be securities if people buy them “with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.” Put another way, if the success of a currency is tied to the success of a related company, it’s probably a security. But a cryptocurrency like bitcoin, which is not tied to a particular company, is not a security.
Celebrities and other online "influencers" commonly tweet and post about all manner of products, but the rules on whether they must disclose that they are being paid for their endorsements are murky.
The Federal Trade Commission, in a document explaining rules for endorsements and testimonials, says celebrities don't need to disclose payments if their online followers already know the celebrities are being paid. The FTC adds, though, that “determining whether followers are aware of a relationship could be tricky in many cases, so we recommend disclosure.”
Federal securities laws are more clear-cut, saying that anyone who is paid by an issuer or dealer to promote securities — stocks, bonds or, yes, certain cryptocurrencies — must note that they are being paid.