Why NIL Athletes Should Brush Up on #Influencer Rules

Apr 3, 2023

gold bitcoin coin on background of growth chart

Yikes! Compliance doesn’t stop with your contracts; federal agencies have a say in your endorsement deals too!

Creating sponsored content on social media is one the most efficient ways for college athletes to monetize their name, image, and likeness, but—when athletes aren’t careful—they could end up paying more in fines than they earned from the NIL deal—particularly when promoting financial products.

With the rise of sponsored content, there’s been an increase in the number of celebrities who have been fined by the Securities and Exchange Commission (SEC) for violating the “unlawful touting” rules around transparency and disclosure of cryptocurrency endorsements.

U.S. securities laws state that any person who promotes a crypto asset must disclose “the nature, source, and amount of compensation they received in exchange for the promotion.”

In many of the unlawful touting cases that have been resolved, the person accused of breaking the rules is required to pay the SEC the original amount of compensation plus interest (known as disgorgement), along with a fine. Additionally, the celebrities involved typically agree to refrain from promoting cryptocurrencies for up to three years—which can amount to a big chunk of change.

Here are just five of the high-profile settlements and cases the SEC has made over the last five years.

Kim Kardashian’s SEC Violation

Kim Kardashian paid $1.26 million to settle charges with the Securities and Exchange Commission in October 2022 for touting a crypto token on social media without disclosing that she had been paid for the endorsement.

According to SEC rules, Kardashian was legally obligated to disclose that she was being paid to endorse the product and how much she was being paid to endorse it. In the end, what could have been a $250,000 payday turned into a more than $1 million loss.

“Investors are entitled to know whether the publicity of a security is unbiased, and Ms. Kardashian failed to disclose this information,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

“Ms. Kardashian’s case also serves as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities,” SEC Chair Gary Gensler added.

Paul Pierce’s Unlawful Touting Case

Kim Kardashian’s SEC violation wasn’t the only deal that’s made headlines in the last year. In February 2023, former NBA MVP Paul Pierce agreed to pay more than $1.4 million in fines to the SEC for improperly promoting a cryptocurrency to his Twitter followers.

Federal regulators say the basketball Hall of Famer—who has branded himself as “The Truth”—was less than forthcoming about the fact that he received $244,000 in crypto tokens to promote the product.

The SEC’s order found that Pierce tweeted misleading statements related to the currency, including tweeting a screenshot of an account showing large holdings and profits without disclosing that his own personal holdings were, in fact, much lower than those in the screenshot.

Without admitting or denying the SEC’s findings, Pierce agreed to pay a $1,115,000 penalty and approximately $240,000 in disgorgement and prejudgment interest. But the settlement impacts his future earnings, too: Pierce also agreed not to promote any crypto asset securities for three years.

Floyd Mayweather’s ICO Case

In November 2018, professional boxing legend Floyd Mayweather, Jr. reached a settlement agreement with the SEC in the agency’s first initial coin offering (ICO) touting violation actions.

The agency found that Mayweather failed to disclose promotional payments from three ICO issuers. Mayweather’s promotions included a message to his Twitter followers that the ICO “starts in a few hours. Get yours before they sell out, I got mine…”

A post on Mayweather’s Instagram account predicted he would make a large amount of money on another ICO, and a post to Twitter said: “You can call me Floyd Crypto Mayweather from now on.” The SEC order found that Mayweather failed to disclose that he was paid $200,000 to promote the other two ICOs.

Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest and agreed not to promote any securities—digital or otherwise—for three years.

DJ Khaled’s ICO Infraction

Another one. Hitmaker Khalad Khaled—better known by his stage name, DJ Khaled—was also part of the SEC’s first round of ICO enforcement. The agency alleged that Khaled failed to disclose a $50,000 payment from a cryptocurrency firm and promoted one of the firm’s ICO’s on his social media accounts as a “game changer.”

Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest. He also agreed to refrain from promoting any securities for two years.

Lindsay Lohan’s Crypto Case

In March 2023, the SEC announced yet another round of enforcement actions against entertainers and influencers—including the actress Lindsay Lohan. According to the agency’s complaint, Lohan accepted $10,000 to promote a crypto token on Twitter.

Lohan’s publicist said that the actress had been unaware of the disclosure requirement and agreed to pay a fine to resolve the matter. Filings show that she had to forfeit the original $10,000 she was paid, plus interest, and pay a $30,000 fine. As with the other touting cases, the SEC requires that Lohan refrains from promoting crypto assets for three years.

The SEC’s rules may seem strict, but they were created to protect consumers from being misled by sponsored content that appears to be genuine personal endorsements. While most of the celebrities who’ve paid settlement fines to the SEC can easily afford the penalties, that may not be the case for NIL athletes. Before promoting any kind of crypto product, NIL athletes should make sure they’re properly disclosing the “nature, source, and amount of compensation” from the deal.

Got questions about how to structure compliant endorsement deals? Ask the experts behind ALC’s NIL Gameday Suite today.