March 2, 2023

SEC and FINRA to Securities Influencers: Disclose the Truth of Your Compensation, or Else!

The SEC has settled several cases of improper celebrity crypto endorsements over the past several years. The most recent example involved NBA hall of famer Paul Pierce, also known as the “Truth.” The crux of the SEC’s allegations in this and similar settlements is that the celebrities failed to adequately disclose the receipt and amount of the compensation they received for their promotions of securities. In particular, Section 17(b) of the Securities Act makes it unlawful for any person to promote a security without fully disclosing the receipt and amount of consideration received or to be received.

17(b) settlements are not limited to crypto promotions, but they have accounted for a significant portion of recent activity in this area. These promotions have often taken place via “influencers’” social media accounts. In the Pierce settlement, the SEC noted that Pierce touted a securities offering via his Twitter account, including by using rocket ship emojis and other space images, analogies, and phrases such as “to the moon,” which the SEC further noted “are widely-used in the crypto asset space to signal expectations that a token will dramatically increase in value.” According to the SEC, Pierce did this without disclosing that he was compensated or the amount of the compensation. 17(b) charges are often a slam dunk for the SEC. In typical fashion, the agency also included a 17(a)(2) charge for “at least negligently” violating that provision of the Securities Act, which prohibits obtaining money or property by means of an untrue statement of a material fact or any omission of material facts necessary to make statements made not misleading in the offer or sale of securities.

FINRA has also come off the bench to provide an update on a somewhat related “sweep” it conducted of broker-dealers’ use of social media influencers and referral programs to acquire customers and related privacy practices. FINRA offered several observations, none of which come as a surprise, such as checking influencers’ backgrounds and reputations before engaging them to promote the firm’s services and setting parameters for prohibited influencer conduct. FINRA also highlighted maintenance of records of influencers’ communications with the public. As any broker will tell you, this is not as simple as it sounds, yet there are pragmatic ways of achieving compliance in this area, including by requiring influencers to use pre-approved templates and text for their social media posts. FINRA also reminded firms that they must comply Reg. S-P and other privacy-related laws, rules, and regulations for protecting customer nonpublic information (NPI). In particular, FINRA highlights limitations surrounding disclosing customer NPI with affiliates and non-affiliated third parties and other related considerations, like customer opt-outs from information sharing with affiliates and third parties. 

The seemingly continual dribble of SEC 17(b) actions against social media influencers will not stop until activity in this area eases up, or, frankly, until promoters take the obvious steps needed to comply by disclosing that they are being paid to promote the offering and noting the amount of compensation. On our “obvious point,” however, while some 17(b) cases involve fraud, many of the fouls in this area seem to have resulted from what may have been a lack of awareness of what is in-bounds activity versus what is not (combined with the razzle dazzle of over-the-top promotional activities). Issuers and promoters should talk to their securities lawyers, like us, before they take a shot at this activity.