SEC fines Kim Kardashian for promoting digital assets on Instagram

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On October 3, 2022, the Securities and Exchange Commission (SEC) issued a cease and desist order (the “Order”) against media personality Kim Kardashian for breach of Section 17(b) of the Securities Act of 1933 (the “Securities Act”), which prohibits any person from promote a “value” without fully disclosing the receipt and amount of compensation received for such promotion. Section 17(b) is known as the SEC’s “anti-soliciting rule”.

The SEC charges stemmed from an Instagram story Kardashian posted on June 13, 2021, about EMAX tokens, a digital asset offered by EthereumMax. The message included a link to the EthereumMax website, through which potential investors could purchase EMAX tokens. Although Kardashian’s Instagram post included “#AD” in a series of hashtags at the end of the post, the hashtag was not sufficient to comply with the requirements of Section 17(b) as Kardashian did not specifically mentioned that she was paid $250,000 to promote the token.

In the order, the SEC found that EMAX was an “investment contract,” which is a “collateral” for securities law purposes. The SEC would have no reason to charge Kardashian with violating its anti-soliciting rule if the token wasn’t a “security.” In determining that EMAX is an “investment contract”, the SEC applied the “Howey test”, as detailed in the 1946 United States Supreme Court case, SEC vs. Howey Co.and concluded that investors had a reasonable expectation of receiving profit based on the efforts of others (in this case, EthereumMax and its agents) for reasons such as the following:

  • EthereumMax frequently highlighted EMAX price increases on social media;

  • EthereumMax and its agents have publicly indicated that they will put considerable effort into developing the EthereumMax platform to increase the value of EMAX tokens;

  • EthereumMax said it would provide a secondary market for EMAX tokens; and

  • EthereumMax’s marketing materials have emphasized the alleged expertise of the company’s management.

SEC Chairman Gary Gensler announced the charges in a
Tweeter at 7:30 a.m. on October 3, 2022, and also appeared on CNBC that same day to discuss the charges. The SEC generally does not seek such publicity as part of its orders, which are usually accompanied only by a press release. However, the increased publicity appears to be consistent with recent statements by the SEC regarding increased oversight and enforcement efforts regarding digital assets that the SEC considers securities. By charging a celebrity with hundreds of millions of social media followers, the SEC garnered unusual press attention for regulatory action and reached a much wider audience.

Without admitting or denying the SEC’s findings, Kardashian agreed to pay $1.26 million, including $260,000 in reimbursement of the promotional payment plus prejudgment interest and a $1,000,000 fine. Kardashian also agreed to cooperate with the SEC investigation and not promote any crypto asset securities for three years.

Kardashian’s coercive action serves to remind participants in the digital asset community of two things. First, promoting digital assets on social media for profit – even with a seemingly innocuous tweet or message – could put the promoter at risk of violating SEC anti-soliciting rules (and possibly of registration of brokers depending on the level of activities of the promoter), to the extent that the underlying asset is a security within the meaning of the United States federal securities laws. And second, the case reminds us that the SEC remains very focused in its efforts to classify a number of virtual currencies as securities.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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