What Are the Rules for Promoting Crypto or NFTs on Social Media?

If you are a crypto token or NFT promoter, you may inadvertently be advertising securities. If you are, you have obligations under the federal securities laws, and even if you are not, there are “best practices” to protect yourself. At a minimum, if you are promoting a security, you must disclose the paid promotion and how much you are getting paid. And as Kim Kardashian learned today, the price tag for failing to do so can be steep. In her case, it is a $1 million fine from the SEC, forfeiture of compensation, interest, and a cease and desist order that precludes her from promoting any crypto asset securities for the next three years. In June 2021, the social media “influencer” with over 200 million Instagram followers posted about the EthereumMax (EMAX) token and linked to its website, which contained instructions for purchasing the asset. However, contrary to Section 17(b) of the Securities Act, she failed to disclose that she was paid $250,000.00 for the post.

Some Cryptocurrencies and NFTs May Be Securities – But Not All of Them.

Promoting crypto or NFTs on social media or Discord can be lucrative, even if you are not getting six figures for it. There are thousands of accounts that are touting the latest and greatest token or NFT project every day. However, many who do so may not realize that the same securities laws that apply to stocks and bonds can also apply to crypto tokens and NFTs. Federal law also regulates advertising of these instruments – not the just the offer and actual sale.

As with any emerging technology, there is no bright line in the law. Not all tokens and NFTs are considered securities – the analysis is a case-by-case application of the Howey test established by the United States Supreme Court in 1946 in the context of investment contracts to purchase a fraction of an orange grove farm operation. The test has since been applied to many other investing permutations. Recently, it has been applied to emerging blockchain-based products, including various crypto assets, tokens, schemes, and similar Web 3.0 endeavors.

Generally, if the crypto asset is being marketed as an “investment” or for its potential to go up in price, profit-sharing, or dividends, there is a good chance the SEC will consider it a security. The EMAX token that Ms. Kardashian promoted was a clear-cut security, with its marketing materials making numerous direct references to increased value through the company’s efforts, token enhancements, sponsorships, and future rewards and staking programs. Accordingly, the disclosure provisions of Section 17(b) applied and the paid promotion disclosures were mandatory to avoid misleading potential investors.

Separately, crypto promoters may also face more serious charges of aiding and abetting the sale of unregistered securities or even investor fraud. In August 2022, the SEC charged three U.S.-based promoters with engaging in an unregistered offer and sale of securities and participating in a scheme to defraud investors. The promoters touted a blockchain-based smart contract operation called Forsage, which in fact was a textbook pyramid scheme that rewarded “investors” for recruiting others into the scheme. The promoters were not engaged in any sales themselves – but rather, they posted interviews, posts, testimonials, and other promotions on YouTube and Facebook. The Forsage case is an extreme example – due to the promoters’ aggressive marketing tactics, denials of liability, and alleged direct involvement in the pyramid itself – but it is a timely reminder to all promoters that they are not immune just because they are not selling directly.

Best Practices for Crypto Asset Promoters.

What are some best practices or rules for promoters advertising crypto tokens or NFTs on social media? The number one best practice is to engage a knowledgeable and experienced attorney to consult you because each token and NFT is its own individual analysis. Additionally:

  • Negotiate a written independent contractor agreement with the token/NFT platform that you are promoting and make sure the platform is willing to indemnify you for any liability related to their offering.
  • If the issuer insists that their offering is a “utility token” or is otherwise exempt from securities regulations, obtain a copy of a legal opinion to that effect or obtain your own legal consultation.
  • If the issuer is based in a foreign country and you are being hired to advertise to a U.S. audience, ask for assurances (including a legal memo) that show the activity is legal in the United States. Countries have varying laws and regulations regarding crypto assets and you should not assume that the promoted asset is legal to offer in the United States.
  • Alternatively, assume that the token/NFT is a security and disclose that you are getting paid to promote it, as well as the amount of compensation. For example, link to or include the following disclosure:

[Promoter] has received compensation from the token/NFT issuer for publicizing the offering of the issuer’s token/NFT. Payment is made in cash and is billed [monthly]. As of [date, but not more than 30 days prior] the promoter has received [$_____] for its services, which began on [date]. [Promoter] may have received additional fees since that time.

  • Negotiate a flat fee for your services that is not a “commission” or otherwise dependent on how many tokens or NFTs are sold. Otherwise, you may be accused of directly profiting from the sale of an unregistered security or aiding and abetting investor fraud.
  • Use caution if you are being compensated with the promoted tokens or NFTs. If the developer is later accused of securities law violations or even a garden variety “pump-and-dump” or “rug-pull” scheme, you as the the promoter may be accused of profiting from the illegal conduct.
  • Use your own best judgment and do your research. If a token or NFT project seems too good to be true or something seems suspicious, you are better off without it. Also, do some basic research on the people involved with the project and determine they have any prior involvement with similar ventures. For example, the individuals involved with Forsage has a prior history of multi-level marketing schemes and similar suspicious associations.

Contact Dan Artaev by email or call or text to set up your initial consultation.

Disclaimer: This guide is for general informational and promotional purposes only. Nothing herein constitutes legal, investment, or tax advice. Every situation is different and faces its own unique set of challenges. Do not take any action or sign any contract until you have obtained specific guidance from a qualified professional.

© 2022 Artaev at Law PLLC. All rights reserved.

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