About a year ago, the SEC issued a warning to celebrities and social influencers who promoted Initial Coin Offerings (ICOs) on social media, noting that such promoters are subject to federal securities laws. Apparently, at least two celebrities weren’t paying attention because they recently settled the SEC’s first cases regarding promoting ICOs without proper disclosures.

Khaled Khaled, better known as music producer DJ Khaled, and professional boxer Floyd Mayweather Jr. both allegedly promoted investments in ICOs for Centra Tech Inc. in 2017 without disclosing the compensation they received in exchange for their endorsements ($50,000 for Khaled and $100,000 for Mayweather). This triggered a violation of the anti-touting provision of the federal securities laws.

A few examples of these endorsements include Khaled referring to Centra’s ICO as a “Game changer” on various social media accounts, and Mayweather tweeting that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…”

Mayweather also allegedly failed to disclose his relationship with two other ICOs that paid him $200,000 for posts such as, “You can call me Floyd Crypto Mayweather from now on.”

In settling the charges, Khaled agreed to pay $152,725 in disgorgement, penalty, and prejudgment interest, while Mayweather agreed to pay $614,775 for the same. Mayweather and Khaled also agreed not to promote any securities, digital or otherwise, for three and two years, respectively.

Although proper disclosures in social media endorsements have been an area of concern for the FTC for years, this settlement indicates that the SEC is just as interested in making sure consumers understand when they’re seeing sponsored content in the marketing of financial products.

For more information on this topic, check out our earlier post on SEC activity and our webinar, “Advertising Under the Influence.”

Most Popular Ad Law Access Posts of 2017

As reported in our Ad Law News and Views newsletter, Kelley Drye’s Advertising Law practice posted 106 updates on consumer protection trends, issues, and developments to this blog in 2017. Here are some of the most popular:

Ad Law News and Views is produced every two weeks to help you stay current on advertising law and privacy matters. You can subscribe to it and other Kelley Drye Publications here and the Ad Law Access blog by email or RSS feed.

2018 Advertising and Privacy Law Webinar Series 

Please join Kelley Drye in 2018 as we continue our well attended Advertising and Privacy Law Webinar Series. Like our in-person events, this series gives key updates and provides practical tips to address issues faced by counsel as well as CLE credit. This webinar series will start again in February 2018. Please revisit the 2017 webinars here.

Earlier this month, the Securities and Exchange Commission (SEC) issued a warning to celebrities and social influencers who use social media to encourage consumers to invest and/or purchase stocks. Recent celebrity endorsements for investment in Initial Coin Offerings (ICOs) were highlighted as examples in the SEC’s warning. In the future, if celebrities and social influencers do not disclose the nature, source, and amount of compensation paid, directly or indirectly, by the company in exchange for the endorsement, they may face action for violations of the anti-touting and anti-fraud provisions of the federal securities laws, participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.

This warning follows a wave of enforcement brought by the SEC earlier this year. In April 2017, the SEC filed civil fraud actions against 27 companies for the fraudulent promotion of stocks. These included three public companies, seven stock promotions/communications firms, two company CEOs, six individuals at the firms and nine writers. The actions were filed under Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, as well as Rule 10b-5, which prohibit fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of securities. In an effort by public companies to generate publicity for their stocks, defendants allegedly hired communications firms that paid writers to publish articles endorsing the company’s stocks. In one case, a firm allegedly had its writers sign non-disclosure agreements preventing them from disclosing that they were compensated.

More than 250 articles were published allegedly without proper disclosures regarding compensation received by the companies they were promoting. Seventeen parties have agreed to settlements with penalties ranging from $2,200 to $3 million based on the frequency and severity of the actions. One example of the kind of advertising that was targeted is shown here: It is a post on Seeking Alpha, an online forum dedicated to financial discussion, in which the post encourages investment in a particular Alzheimer’s therapy. The author’s name and picture allegedly were false as was a statement in the article that indicated that it was not sponsored content.

Here’s the lesson: The FTC is very much interested in ensuring that advertisers and their agents disclose when they disseminate sponsored content (as we’ve repeatedly written about here), but the FTC isn’t alone. The SEC clearly shares this concern, as does FINRA, which issued this notice in April 2017 addressing disclosure obligations relating to native advertising. For more information about how advertising standards apply to influencers and native advertising, check out our recent webinar here.

Associate Lauren Myers contributed to this post. She is practicing under the supervision of principals of the firm who are members of the D.C. Bar.

This morning, the FTC announced that it had reached a settlement in its first-ever complaint against individual social media influencers and that it had sent warning letters to other prominent influencers. In addition, the FTC announced that it had updated previous guidance on influencer campaigns.

Settlement

The settlement involves Trevor Martin and Thomas Cassell, owners of CSGO Lotto, an online multi-player game. Martin and Cassell are also social media influencers who have gaming channels on YouTube with millions of followers. Starting in 2015, both men posted videos of themselves playing the game and discussing how they had won money. They engaged in similar activities on other platforms, including Twitter and Instagram. None of the videos or posts, however, mentioned any connection to the company. Martin and Cassell also paid other influencers to promote the game on social media. Most of individuals did not disclose their connections to the company and the few who did only did so “below the fold.”

Last year, various media outlets broke the news that Martin and Cassell ran the CSGO Lotto site. Many fans who had assumed that the men’s reviews were unbiased became upset, controversy followed, and the game shut down. Now we know that the FTC got involved, as well. As part of the proposed settlement with the Commission, Martin and Cassell are prohibited from misrepresenting that any influencer is an independent user. Instead, any connection between an influencer and the product being promoted must be disclosed in a “clear and conspicuous manner.”

Warning Letters

In April, we noted that the FTC staff had sent “educational letters” to more than 90 social media influencers, reminding them of their obligation to disclose any connection they have to the companies whose products they promote. Today, the FTC announced that they had sent new “warning letters” to 21 of those influencers.

The new letters cite specific posts that concerned the FTC staff and explained why those posts might not comply with the Endorsement Guides or the FTC Act. For example, some of the letters noted that the staff believe that tagging a brand is an endorsement of the brand. “Accordingly, if you have a material connection with the marketer of a tagged brand, then your posts should disclose that connection.” Other letters stated that simply thanking a brand is not a sufficient disclosure. And others reminded influencers that disclosures must be easy to find, and that consumers shouldn’t be required to click a link in order to find them.

Updated Guidance

The FTC also released an updated document with answers to frequently asked questions. This version includes more than 20 new answers addressing specific questions that marketers and influencers may have about whether and how to disclose material connections in their posts. For example, the document covers topics such as including tags in pictures, disclosures on Instagram, disclosures on Snapchat, how to disclose free travel, and terms that can be used in disclosures.

Stay tuned for more coverage of these developments.

In November, we posted that four consumer groups had sent letters to FTC, encouraging the agency to investigate and bring enforcement actions regarding the use of influencers on Instagram. In April, the FTC responded by sending more than 90 letters to companies and influencers, reminding the recipients of their legal obligations. Now, the consumer groups have again contacted the FTC to complain that the agency needs to do more.

According to the latest letter, the groups tracked the 46 influencers who received letters from FTC to determine if the letters had been effective. According the survey, only one of them consistently used “proper disclosures” for paid posts. Although some influencers did occasionally post sponsored content using proper disclosures, some posts allegedly failed to comply with legal requirements. The groups concluded that the FTC’s letters were ineffective and pushed for more regulation.

The groups want the FTC to “bring enforcement actions and seek penalties for posting nondisclosed sponsored content, especially for influencers and brands that are repeat offenders.” In addition, the groups want the FTC to “work with Instagram to develop a system that makes it easy to denote paid posts consistent with FTC guidelines.” We noted last month that Instagram is already working on such a system, but the groups don’t think that it’s sufficiently robust.

As we’ve noted before, both the groups’ letters to the FTC and the FTC’s warning letters swept too broadly and included a number of posts that were not incentivized. (Click here for a BuzzFeed article with some examples.) Nevertheless, there are various examples in the latest letter that are potentially problematic and potential targets for enforcement.

If you haven’t evaluated how your company works with influencer recently, now may be a good time to do that.

In November, we posted that four consumer groups had sent letters to FTC, encouraging the agency to investigate and bring enforcement actions regarding the use of influencers on secretsInstagram. In what may be a response to that encouragement, the FTC just announced that it had sent more than 90 letters to companies and influencers, reminding the recipients of their legal obligations.

The letters state that consumers need to know if there is a material connection between a company and an influencer who promotes the company’s products or services. Unless the connection is otherwise evident from the context, the influencer is required “clearly and conspicuously” disclose the connection.

There are at least four noteworthy aspects to these letters:

  • Thus far, the FTC’s enforcement efforts have been focused primarily on companies. Some of these letters, though, were sent to celebrities, athletes, and other influencers. This could signal broader enforcement in the future.
  • The letters address some issues that are unique to Instagram. Consumers who view Instagram posts on mobile devices typically see only the first three lines of a longer post, unless they click “more.” When making endorsements on Instagram, influencers should generally disclose any material connection above the “more” button, so that the disclosure is less likely to be missed.
  • The letters also noted that when posts include multiple tags, hashtags, or links, readers may just skip over them, especially when they appear at the end of a long post. It’s important to ensure that important disclosures don’t get lost in the mix. This might require leading with the important disclosures or making sure that they otherwise stand out.
  • Some of the letters addressed particular disclosures that the staff believes are not sufficiently clear. For example, some letters pointed out that consumers may not understand a disclosure like “#sp,” “Thanks [Brand],” or “#partner” in an Instagram post to mean that the post is sponsored. Although there’s no one-size-fits-all way to make that disclosure, a term that is subject to multiple interpretations may not be sufficient.

These types of letters are often a precursor to more formal action, so this might be a good time to revisit your influencer agreements and campaigns.