Shaquille O’Neal has joined the ranks of celebrities under fire for promoting cryptocurrency on social media. Celebrities including O’Neal, Kim Kardashian and Tom Brady have been sued for different reasons, but they have two things in common: crypto and speech. For example, the Securities and Exchange Commission (SEC) has brought numerous enforcement actions to curtail securities-related online communications, and several class action lawsuits have targeted athletes for making social media posts about crypto companies or non-fungible token (NFT) projects that may have no bearing on securities law.
The Federal Trade Commission (FTC) also recently introduced a new rule banning fake reviews, consumer testimonials, and the misuse of social media indicators, such as followers or views generated by a bot. Time will tell how the FTC will pinpoint violators in the ocean of frothy posts lurking on social media platforms, and how many enforcement actions await crypto users.
This is a worrying trend — not just because so many individuals are being caught up in these legal forays — but that the target of these legal actions is speech. With so many high-profile names being targeted for crypto-related speech made on social media, does this phenomenon have a chilling effect on similar speech made by the general public? What should be done to increase healthy and compliant social media communications for participants involved in paid cryptocurrency activities?
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While light-touch regulation can address and prevent market harms stemming from the unscrupulous behavior of bad actors using social media to deceive the public — which happens more often than many would like to admit — legitimate speech should not be unintentionally caught in the fray and suppressed by overzealous policing.
One of the most controversial examples of regulators targeting celebrity promotion of cryptocurrency on social media is Kim Kardashian’s tussle with the SEC. In that instance, Kardashian touted EMAX tokens on her Instagram account and placed a #AD disclosure notice — which alerted viewers that she was getting paid for the promotion — in the far bottom right corner of the post. Was this enough for Kardashian to escape liability?
According to the SEC, Kardashian’s disclosure was insufficient. Federal securities laws required promoters of crypto securities to disclose three things: the nature, source, and amount of the compensation received in exchange for the promotion — which Kardashian didn’t do. Without admitting fault, Kardashian settled with the SEC, paying a hefty disgorgement and penalty fee. She also agreed not to promote crypto securities on social media for three years. In 2023, a similar three-year ban on crypto promoting on social media was ordered by the SEC in settlement cases against musician Austin Mahone and NBA player Paul Pierce.
Although it is unclear whether Kardashian, Mahone, and Pierce voluntarily waived their right to engage in commercial speech on social media — including promoting crypto securities in a compliant manner — it is worth considering whether this type of speech-suppressing mandate is an acceptable and constitutional remedy in SEC enforcement cases.
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While commercial speech — which promotes some type of commerce like advertising — is protected under the First Amendment, it doesn’t have the same level of protection as noncommercial speech. The reason? Courts have said that commercial speech isn’t immune from government regulation and can be regulated if false or misleading.
The historical reasoning for the SEC’s disclosure requirement for promotions is to help the public distinguish between paid and unbiased opinions published in the news. Similar to the SEC, the FTC has disclosure guidance for social media influencers who endorse products. Its reason is to protect the public from deceptive marketing. Compared to the SEC, however, the FTC’s disclosure standard is lightweight: influencers only need to disclose their relationships with brands. In fact, according to FTC guidance, Kardashian’s #AD may have passed regulatory muster.
One solution to helping the general public — and celebrities — comply with federal law is to create uniform disclosure requirements for promoting crypto activities. For example, reducing the SEC’s three-part promotion requirement to the FTC’s single-part endorsement standard would be a much clearer path to follow and would still accomplish the purpose of the regulation — to increase market transparency and reduce fraud. A simplified standard would be a boon for celebrities like Shaquille O’Neal who find themselves in a purgatory of sorts where courts are in the process of deciding when NFTs are securities.
Because the Securities Act requires promoters to disclose their consideration — or fee — among other things, this proposed change might require a statutory amendment, which is a significant hurdle to jump. Alternatively, social media companies could create tools to help viewers easily identify paid posts. While controversial, Elon Musk’s introduction of verification check marks and identification tags on X that labeled government-funded and state-affiliated posts are creative ways that increase the transparency of social media content. Similar tools might be considered to notify the public about paid posts and help users comply with federal regulations.
Resolving the constitutionality of the SEC’s regulation of commercial speech on social media and the agency’s three-year speech ban would be the mother of all rabbit holes to explore. However, this area is ripe for review as scholars have previously questioned whether SEC disclosure rules are unconstitutional and, more broadly, how to impose First Amendment constraints on the SEC’s regulatory authority.
The broad crackdown on crypto-related commercial speech made on social media may have a chilling effect on free expression and may actually discourage legitimate free speech and conduct. What America needs is balanced laws and regulations that protect consumers from fraud without suppressing the public’s right to speak freely — and, if they desire, get paid for doing so.
Agnes Gambill West is a guest columnist for Cointelegraph, an associate professor at Appalachian State University and an attorney startup advisor. She serves on the Business and Consumer Payments Advisory Council for the Federal Reserve Bank of Richmond, is an advisor to the North Carolina Blockchain Initiative, and was appointed by the lieutenant governor of North Carolina as the vice chair of the North Carolina Innovation Council. She was previously a proprietary trader on Wall Street, the co-founder of an Ethereum-based blockchain company, and a visiting senior research fellow at the Mercatus Center. She received a JD from University of North Carolina School of Law, an LLM from Duke University School of Law, and an MSc from Oxford University.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.