The Securities and Exchange Commission announced on Oct. 3 that Kim Kardashian settled an allegation that she promoted “a crypto asset security offered and sold by EthereumMax without disclosing payment. [of $250,000] received for the promotion.” Although he cooperated and settled the case with $1.26 million in penalties, the indictment highlights the liability that “influencers” increasingly face as result of an activist SEC that has failed to establish regulatory clarity.
Pushing influencers to leave the United States
Addressing the agency’s action against Kardashian, Jacob Robinson, a legal scholar and host of the Law and Code podcast, pointed out that “The net-positive is [that] This probably leads to less shilling from celebrities who have no knowledge of the underlying project and just get a big payday.”
Thanks to the proliferation of social media platforms, content creators and influencers have emerged and are working with brands to promote products and services. Unfortunately, the “maker economy” has also had drawbacks. In particular, influencers have often sold products and services that may not serve everyone’s interests, accepting payment from companies in exchange for their support.
While this privilege can be, and often is, abused, influencers do nothing systematically different from what corporations do when they run paid advertisements in the media and on television, or even when board members are ‘unite and adhere to a service to share their networks and promote an organization. When a corporation publishes an advertisement in a major newspaper or magazine, such as The New York Times or Vogue, are the media outlets equally responsible for not disclosing their acceptance of payment to all readers? Clearly not, and the media business model would quickly collapse if they couldn’t embrace these paid advertising opportunities.
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So why are influencers treated so differently, and why can they be held personally liable and targeted by a federal agency? Consider the auto market: If a used car dealer sells a customer a car that is later recalled or turns out to have some other defect, does a regulatory agency identify it? The car company could be, as we’ve seen with Volkswagen, Toyota and others over the years, but the individual employee is generally free of this liability.
The SEC’s action against Kardashian risks alienating and stifling other members of the creative economy. While he can afford the $1.26 million fine, a little more than $1 million above what he earned, many content creators don’t make more than six-figure salaries each year. The action also threatens to push many content creators out of the United States to countries that have more favorable policies.
Definition of values and responsibility
The SEC has adhered to an old Supreme Court ruling from 1946, SEC v. WJ Howey Co., which gave rise to what is now known as the “Howey test.” The Howey test defines an “investment contract” if the following conditions are met: 1) an investment of money 2) in a common enterprise 3) with the expectation of profits 4) arising from the efforts of others.
The test, however, was introduced in a completely different economy than we have today. Of course, many projects involving the release of fungible tokens easily fall into the security category, no matter how liberal one wants to be with the definition. But other projects, especially non-fungible token projects, are in a much grayer area. Many NFT projects do not convey any expectation of profit to their potential holders, instead emphasizing benefits and exclusive access to events, classes or offers.
It is true that the recent SEC regulatory action went after Kardashian for her promotion of EthereumMax (EMAX) without disclosing that she had received a payment rather than EthereumMax being a security, as it was certainly another case of easy and clear But the case highlights a major challenge that influencers will inevitably face in the Web3 economy if they have to worry about regulatory risk against themselves in order to promote different projects, even if they only post on the networks social.
Other countries are taking a very different approach to Web3. For example, the United Arab Emirates has made it clear that it wants its economic success to be measured by its “gross metaverse product” rather than the conventional gross domestic product that has become the norm for cross-country comparisons of productivity . The UAE, among others (like Singapore), has become a hub for entrepreneurs and startups.
What happened to Kardashian could happen to others
If the regulatory concern is that influencers are abusing their authority by promoting products and services without disclosing the receipt of compensation, then Web3 lends itself perfectly thanks to greater transparency and accountability on the blockchain. In particular, influencers could have their digital wallets open for viewing so that their remuneration is open and their own purchases are visible. (There is still a need for privacy-preserving blockchains, as not everything in everyone’s life should be exposed, but with blockchain, there is much more potential for transparency and surrender of accounts where it matters).
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Web3 also allows content creators to get paid for their creative content without having to rely so heavily on centralized entities for brand agreements and partnerships. NFTs, for example, allow artists to transform audiences into communities that interact directly with their content.
What happened to Kardashian could have happened to several influencers. While it’s true that regulatory actions without penalties don’t have much bite, and often, such penalties are necessary to signal that an agency is serious, an alternative strategy would have been to reach out to Kardashian and galvanize support among a body of influencers for settle down stronger. more transparent rules around product and service promotions, especially crypto projects that could be classified as securities. This approach is more collaborative and would help establish shared norms and best practices among crypto enthusiasts.
Christos Makridis is an entrepreneur, economist and teacher. He serves as COO and CTO at Living Opera, a Web3 multimedia startup, and holds academic positions at Columbia Business School and Stanford University. Christos also holds a doctorate in economics and management sciences from Stanford University.
This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph. The author was not compensated for any of the projects cited in this piece.
