Celebrity backing of ICOs may be illegal

The US securities watchdog has warned that movie stars and professional athletes who endorse digital coin offerings could be breaking the law.

In its latest warning, the Securities and Exchange Commission pointed to the number of celebrities who are throwing their support behind businesses that raise funds through the internet.

Boxer Floyd Mayweather, actor Jamie Foxx, and socialite Paris Hilton are among the celebrities who have helped kindle interest in ICOs or token sales, which have raised more than US$3.2 billion this year, according to reports.

The SEC worries that a problem could arise where celebrities offer legitimacy and attention to coin offerings that might have otherwise gone unnoticed.

The US regulator’s warning comes just as ASIC said it views many ICO as a type of Managed Investment Scheme and therefore subject to the Corporations Act. 

"If the value of the digital coins acquired is affected by the pooling of funds from contributors or use of those funds under the arrangement, then the ICO is likely to fall within the requirements relating to be a managed fund," the corporate watchdog said last month.

Meantime, ASIC also warned that investors face a high risk of losing their cash.

Artists acting as brokers

According to the SEC, celebrity endorsements may be unlawful if digital coins are considered securities and the celebrity does not disclose the nature, scope, and amount of compensation received in exchange for the endorsement. 

"A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws,” the SEC’s Enforcement Division and Office of Compliance Inspections and Examinations said in a joint statement.

“Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered broker." 

"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.

"We encourage investors to research potential investments rather than rely on paid endorsements from artists, sports figures, or other icons.”

The SEC also recently warned investors that ICOs could be used to manipulate a company’s stock price.

In July, it found that some of the coins may be considered securities subject to federal rules and obligations.

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