Boxer Floyd Mayweather is very rich. This summer he became richer still by promoting "initial coin offerings," which invite people to purchase digital tokens in exchange for online services—but are also a controversial type of speculative investment.
Mayweather is not the only famous figure to get in on the ICO fad. Hotel heiress Paris Hilton is also promoting the digital coins, while a famous soccer player is too. Their involvement is on one hand just another form of celebrity endorsement. But there's an important difference: The celebrities, whether they know it or not, risk tripping over federal securities laws and, according to legal experts, putting themselves in possible legal jeopardy with the SEC.
50 Cent's Penny Stocks to Paris's Lydian Coin
Certain celebrities will put their name on just about anything. It can be a junky hair product or a caloric breakfast cereal—some stars don't care as long at it earns them money. But as 50 Cent discovered, the rules are different when it comes to the stock market.
In 2011, the rapper (whose real name is Curtis Jackson) used his Twitter account to extol the penny stock of a tech startup he owned called H&H Imports. Predictably, the share price soared as muppet investors heeded 50 Cent's investment advice, and then cratered not long after. The episode gave rise to widespread media attention and reports the rapper could be subject to a pump-and-dump investigation by the SEC. (This didn't materialize, apparently because 50 Cent didn't sell when the stock went up.)
Fast forward six years later, and celebrities have found a new way to use their social media accounts to tout investments. In this case though, they are hyping initial coin offerings rather than traditional shares.
Floyd Mayweather has been the most prominent ICO booster. In late July, he posted a picture of himself on Instagram with a suitcase of cash, boasting "I'm gonna make a $hit t$n of money ... on the Stox.com ICO."
Stox is a company that recently raised over $30 million selling tokens that, it claims, can one day be redeemed for a service that will offer predictions for sports, the stock market and "even the weather." The ICO also received an endorsement from soccer star Luis Suarez who encouraged his followers to "sign up like me" for stox.com.
Mayweather, meanwhile, has embraced his pitchman role for ICOs even further, tweeting "You can now call me Floyd Crypto Weather"—a reference to cryptocurrency technology that undergirds every coin offering. His tweet also contained an endorsement for the ICO of a company called Hubii Networks:
Like Stox, Singapore-based Hubii Networks doesn't appear to be much more than a website and a plan to launch a business based on blockchain technology (in this case a "descentralised content marketplace"). Nonetheless, the company says it concluded a successful ICO on Friday, raising over 22,261 units of the digital currency Ethereum—worth about $6.7 million dollars.
Meanwhile, it's not only actors getting in on the ICO action. Paris Hilton took to Twitter last week to tout her enthusiasm for cryptocurrency, and talk up something called LydianCoin:
The company beyond LydianCoin is an advertising-tech firm run by a CEO who in 2011 pled guilty to beating his girlfriend. Its business plan for the ICO proceeds appear ambitious, but also indecipherable. Here's how the Financial Times describes it (subscription required):
The digital advertising business claims to be “the world’s first A.I. big data marketing cloud” and is raising $100m (!!!) through the sale of Lydian “tokens” to finance the development of… well, nothing really...
If the whitepaper is to be believed, the whole idea here is that people will pay for Lydian tokens and use them to buy advertising campaigns from LydianCoin, which in turn licences its technology, products and services from Gravity4. The money won’t be used for anything. It will just sit there, covering the enormous balance sheet liability this ICO will create for LydianCoin.
You see the pattern here: Obscure companies with little more than a white paper are springing up and raising millions of dollars on the Internet and—in at least some cases—with the assistance of a celebrity pitchman. The question is whether these offerings are legal—and whether celebrities like Mayweather face trouble if they're not.
The SEC is not amused
Initial Coin Offerings are both a new type of technology and, in the eyes of some, a means to democratize corporate fund-raising. They also look a lot like the sale of unlicensed securities.
In July, the SEC issued a warning shot by declaring that digital tokens sold in a high-profile ICO last year were in fact securities that should have been registered with the agency. And in late August, it froze the shares of four companies on suspicions they were hyping upcoming ICOs in order to conduct pump-and-dump scams.
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More broadly, regulators across the world—from Canada to China to Singapore—are cracking down on ICOs in order to protect investors. In doing so, they're rejecting the notion that the "coins" sold in ICOs are simply tokens to access a game or a service, and treating them instead as investments.
"Aside from pure in-game token situations, companies really need to think of these as securities," says Jeffrey Neuburger, who advises clients about ICOs at the law firm Proskauer in New York.
Neuburger adds that those promoting the securities, including Mayweather, could face serious consequences, especially if the company in question has not been truthful in the course of the token offering.
"If they know something is not right and they endorse it, there could be all sorts of fallout, including SEC action and even criminal charges if there is evidence of fraud," he says.
There is no evidence that the companies endorsed by Mayweather, whose publicity firm did not respond to a request for comment, have done anything wrong. Nonetheless, he may be deemed among those responsible if the SEC decides the firms engaged in the illegal sale of securities.
The SEC declined to comment for this article.
The involvement of the celebrities in the ICO phenomenon is also significant because the products are not just another piece of merchandise. Unlike using social media to endorse a shoe or a breakfast cereal—which can lead to an FTC slap-on-the-wrist if payment arrangements are not disclosed—the stakes when it comes to securities (if indeed that is what the tokens are) are much higher.
This is partly because of federal laws involving the promotion of shares to the public.
"If you associate yourself with an offering, you can be deemed responsible for making statements in regard to the offering," says Vince Martinez, former Chief of the SEC Enforcement Division's Office of Market Intelligence, who now works at the law firm K&L Gates.
Martinez pointed to Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Securities Exchange Act—which forbid misrepresentations in the course of security sales—as potential dangers for Mayweather and others who make glib or inaccurate statements about ICOs.
"I think they'll come to realize they’re in similar jeopardy," Martinez says. "I think they're in the SEC crosshairs."
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