Public interest in cryptocurrency has led to a rush of recent advertising, mostly on social media and the internet. Much of that advertising has focused on driving consumer interest in contributing money to an Initial Coin Offering or ICO. Unlike other forms of private investment, which are off limits to all but wealthy, accredited investors, interest in cryptocurrency extends beyond Wall Street to Main Street investors and this has regulators worried. Where some see opportunity, regulators see potential fraud and abuse.

The ads that seem to have regulators most concerned are celebrity endorsements. Within the last year, DJ Khaled, Floyd Mayweather, Evander Holyfield, Paris Hilton and Jamie Foxx have all endorsed a particular ICO or cryptocurrency on social media, often in ways suggesting the potential for wealth and riches. And not all of those ICOs have gone on to success. In fact, as discussed below, the one pitched by Holyfield was shut down by the U.S. Securities and Exchange Commission (SEC).

The risks to Main Street investors has prompted regulators to rush onto the scene and begin closely monitoring efforts to market cryptocurrencies to consumers. Below are some of the more significant developments over the past several months, as well as thoughts about what may lie ahead.

SEC Targets Celebrity Endorsements

One of the earliest shots across the bow came from the SEC. While the SEC isn’t exactly known for targeting celebrity endorsements on social media (the FTC usually does that), it issued a statement on November 1, 2017, urging consumers to be skeptical of celebrity-endorsed ICOs and warning endorsers that they “must disclose the nature, scope, and amount of compensation received in exchange for the promotion.” Failure to do so, said the SEC, would violate the anti-touting provisions of the federal securities laws.

Traditionally, the SEC’s tool of choice for targeting so-called “pump-and-dump” schemes, anti-touting laws, curtail the ability of paid promoters to influence the price of a security through endorsements. Case in point: the anti-touting provision of the Securities Act of 1933 makes it unlawful to “give publicity to … any … advertisement … or communication which … describes [a] security for a consideration received or to be received … without fully disclosing the receipt … of such consideration and the amount thereof.”

This is similar to the FTC’s “material connection” rule: “when there exists a connection between the endorser and seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.” But notice that the SEC version goes a step further and requires disclosure of the amount of compensation received by the endorser.

SEC Obtains Court Order Stopping ICO

Two months after the SEC’s statement, Evander Holyfield endorsed an ICO for AriseBank on Twitter.

Weeks later, the SEC obtained an injunction to stop the ICO from going forward. According to the SEC’s complaint, AriseBank and its co-founders falsely told potential investors that AriseBank was FDIC insured and also concealed information about the criminal backgrounds of key executives. In announcing the injunction, the SEC called AriseBank “an outright scam.”

So far, the SEC has not pursued any enforcement action against Holyfield himself. It will be interesting to see if that holds true. If Holyfield received any “consideration,” or payment, for his endorsement, including any AriseCoin, he could face potential exposure under federal anti-touting laws.

Facebook, Google and Twitter Restrict Cryptocurrency Ads

On January 30, 2018, the same day that the SEC announced the AriseBank injunction, Facebook announced a new policy on cryptocurrency ads: “Ad must not promote financial products and services that are frequently associated with misleading or deceptive promotional practices, such as … coin offerings, or cryptocurrency.”

Google followed suit, announcing in mid-March that it would phase out all cryptocurrency and ICO ads by June 2018, and, shortly after Google’s announcement, Twitter confirmed that it too would begin prohibiting most types of cryptocurrency advertising. Based on reporting by Reuters, Twitter’s policy will prohibit advertising of ICOs and token sales, and will also prohibit ads by cryptocurrency exchanges and wallet services not listed on a major stock exchange.

With Facebook, Google and Twitter effectively shutting the door on cryptocurrency advertising, the opportunity to reach Main Street investors has diminished, but it certainly has not disappeared. Private networks, targeted electronic and print ads, and word-of-mouth are still powerful means for reaching consumers, and government regulators like the SEC are likely to shift their focus to these areas in the near future.

FTC Shuts Down Cryptocurrency Chain Referral Scheme and Creates Blockchain Working Group

More recently, the FTC has gotten in on the action, shutting down an operation that recruited participants in a so-called “Bitcoin Funding Team.” The concept of a funding team sounds a bit like an ICO but, according to the FTC, it was nothing more than a chain referral scheme. A recruit would make a cryptocurrency donation, which would then be paid to “upline” team members, and the recruit would make money as additional recruits joined the team.

Despite the obvious differences between the alleged scheme and a legitimate ICO, this case is nevertheless noteworthy because it shows that the FTC is likely to become a key regulatory player in this space. The SEC and FTC will almost certainly share jurisdiction over cryptocurrency advertising going forward. Typically, the FTC focuses on advertising claims and practices (including endorsements) that could be deemed false, misleading or deceptive. But where the product being endorsed is a security (as the SEC alleges cryptocurrency is), the SEC has jurisdiction to investigate and pursue a claim under the anti-touting laws.

When it announced the Bitcoin Funding Team case, the FTC also announced that it had formed an internal Blockchain Working Group aimed at preventing fraudsters from capitalizing on the excitement and confusion surrounding cryptocurrencies to bilk consumers. This is significant because it foreshadows potential specific guidance for cryptocurrency advertisers.

Looking Ahead

Notwithstanding the significant curtailment of cryptocurrency advertising, two things are very clear. First, consumers remain extremely interested in cryptocurrency, and advertisers will find a way to reach them. Second, regulators will not view recent advertising bans on Facebook, Twitter and Google as victory; to the contrary, they will almost certainly redouble their efforts to smoke out and pursue those who are using consumer interest to perpetrate fraudulent schemes.

As the industry matures, however, expect to see continued focus on advertising practices. This will inevitably focus on endorsements and whether any material connection between the endorser and the product was properly disclosed, but it will also touch on issues like claim substantiation (are the specific claims in the ad true and by evidence?), deception (has material information been omitted?), and disclosure (does the ad clearly and conspicuously disclose any material terms or limitations?).

Until specific guidance is published, if ever, advertisers should proceed cautiously and should absolutely avoid: (i) paid endorsements that fail to disclose the amount of the payment, (ii) claims that that a currency or product will be a good investment or low-risk, (iii) imagery or depictions suggesting wealth, and (iv) any other element that could be deemed misleading or deceptive.

This is a guest post by Neil Austin, Co-Chair, Advertising & Marketing Practice at Foley Hoag LLP. Views expressed are his own and do not necessarily reflect those of BTC Media or Bitcoin Magazine.