SEC warns of ‘potentially unlawful’ celebrity-backed initial coin offerings

U.S. regulators on Wednesday issued a warning about the exponentially growing initial coin offering market with a simple message: Do not get seduced by the glitz and glamour of some of the biggest celebrities backing select campaigns.

In a surprising statement, the U.S. Securities and Exchange Commission cautioned investors that celebrities — including DJ Khaled and Paris Hilton — often lack sufficient expertise to advocate for investments. SEC also added that such endorsements can be “potentially unlawful” if the celebrities do not disclose their compensation.

“Celebrities and others are using social media networks to encourage the public to purchase stocks and other investments,” said the SEC. “These endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”

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Initial coin offerings, or ICOs, are similar to initial public offerings on Wall Street — but with less regulation and a lot more internet. Instead of selling traditional shares of a company on the New York Stock Exchange or Nasdaq to raise capital, the company runs a campaign to sell digital tokens through cryptocurrencies. Because of a lack of government regulations, anyone can buy these tokens once the ICO opens.

ICOs leaped in popularity in 2017, as startups were able to generate hundreds of millions of dollars in capital through the method. As ICOs remain white-hot, some — including the CEO of a new, popular cryptocurrency called Ethereum — warned of an ICO bubble.

“I indeed think that we are in a bubble because all the cryptocurrencies are rising and people have a feeling that they will always continue to rise,” said Ethereum CEO Vitalik Buterin in an interview in Israel in September.

Thanks to ICOs’ free-for-all approach with little to no hurdles to clear, celebrities in recent months have endorsed ICOs to make a quick buck. Boxers Mike Tyson and Floyd Mayweather, rapper The Game and soccer star Luis Suarez joined DJ Khaled and Paris Hilton in endorsing ICOs.

“Celebrities who endorse an investment often do not have sufficient expertise to ensure that the investment is appropriate and in compliance with federal securities laws,” said the SEC. “Conduct research before making investments, including in ICOs.”

Photo: Bitcoin tokens in Sandy, Utah, in 2013. (Rick Bowmer/AP)

 

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