Maryann Lennon – On October 3, 2022, the Securities and Exchange Commission (SEC) charged Kim Kardashian for promoting a cryptocurrency (Crypto) asset security on social media that was offered and sold by EthereumMax (EMAX) without disclosing the $250,000 payment she received in exchange for the promotion. EMAX, which launched in May 2021, is advertised as a “culture token” that will “bridge the gap between the emergence of community tokens and the well-known foundational coins of crypto.” Ultimately, Kardashian cooperated with the SEC’s investigation and agreed to settle the charges. Kardashian paid $1.26 million in penalties, disgorgement, and interest, and agreed not to advertise anything crypto related for the next three years.
The SEC requires celebrities “to disclose to the public when and how much they are paid to promote investing in securities.” Currently, the SEC does not have a mandate specific to crypto promotions, it but tends to categorize the vast majority of digital assets as securities. Even though EMAX’s promoters have not officially labeled their token as a security, and never registered it as such with the SEC, the SEC seemingly did so on its own. While few crypto labeled securities have faced SEC action, the SEC’s labeling here invites increased scrutiny as it signifies what is required of a crypto project and its promoters.
From its conception, EMAX has faced significant backlash and criticism for being a scam. The token was launched last year in May “with a transaction volume of $16.11 million and a price of $0.00000005875,” but the value would fluctuate depending on the the company’s ability to land a celebrity partnership or endorsement of the token on their social media profiles to audiences exceeding millions of viewers. On July 15, 2021, the price of the EMAX token hit a record low at $0.000000017 per unit, a 98% drop from which it has not been able to recover to date. One EMAX token holder that bought between May 14, 2021 and June 27, 2021, claims to have suffered an immense financial loss, similar to other token holders that invested in EMAX during the past few years. As a result, the holder petitioned a California federal court to request that it grant class-action status to his lawsuit against the company and its celebrity promoters. EMAX took to Twitter to respond to these claims, asserting that “The deceptive narrative associated with the recent allegations is riddled with misinformation about the EthereumMax project,” and “We dispute the allegations & look forward to the truth coming out.” Although the company found itself in hot water, it would, of course, prefer to be classified as a security—not a scam.
Kardashian is not the first celebrity to partake in the crypto craze, touting it all over her social media channels, and will likely not be the last. Some celebrities that have lended their names and social platforms to promote digital assets include Gwyneth Paltrow, Reese Witherspoon, Paris Hilton, Tom Brady, Floyd Mayweather, and more. There were alternate avenues that the SEC could have taken to caution investors, other celebrities to make an examples of, and countless other token promotions that could have been found in violation of securities regulations, but there was only one token which Kardashian endorsed on her social media. It is likely that the SEC decided to take aim at Kardashian because of the impact and long reaching effect they could have going after someone with a following like hers. As of June 2022, Kardashian is the 8th most followed handle on Instagram, with over 318 million followers, making her one of the most powerful influencers in the world. It is apparent that Kardashian has a unique ability to spread a message or promotion to a wide audience and has the power to single handedly impact the success of a business. The SEC is concerned about partnerships like Kardashian’s with EMAX, as SEC Chair Gary Gensler explains, because “when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors.” Investors are encouraged to research potential investment opportunities and arrive at a decision that is fiscally sound for their financial situation. The influence of celebrities, who are paid to promote companies on their social channels, could sway investors into thinking that investing in a particular company would be a good investment for them as well if it has a celebrity’s stamp of approval—especially one with over 300 million followers. A celebrity of Kardashian’s magnitude may seem untouchable to an agency like the SEC, and while the financial penalty is not a hard-hit for the billionaire, Kardashian’s acknowledgement of the fine and her cooperation with the charges was a win for the SEC, even if Kardashian did not admit or deny the SEC’s findings.
In bringing charges against one of the world’s biggest celebrities, the SEC urged caution regarding potentially unlawful endorsement of celebrity-backed crypto asset offerings. Its legal action against Kardashian serves to caution investors against making uninformed investment decisions based solely on the recommendations of a celebrity. Interestingly enough, the press that resulted from the SEC’s action against Kardashian produced an initial bump for EMAX, as EMAX rallied over 40% following the SEC action. “Yes, we have had a good pump today thanks to the SEC and the free advertising from them,” a spokesperson for the EMAX stated. While it remains to be seen how EMAX will fare in the wake of the charges against Kardashian in the long term, the SEC has made it very clear that it is keeping an eye on celebrity promotions, and is not afraid to make an example of those that abuse its policies.
Note: This article was originally submitted for posting in November 2022.
