Originally published on March 11, 2018
Anyone who endorses ICOs or any kind of Cryptocurrency should be careful not to overstep the Securities Laws and potentially be prosecuted for a Pump and Dump scheme. After the recent Senate Hearing on Feb 9, 2018, Securities and Exchange Commission (“SEC”) Chairman Jay Clayton made it abundantly clear that the SEC views ICOs as securities offerings, which means all of the Securities Laws apply in our beloved crypto space.
We have been operating without regulation for some time now, and many celebrities have taken to pumping (“paamping”) certain ICOs they like. If they are acting as a paid promoter for the ICO, they need to be aware of the Promoter and Anti-Touting provisions of the Securities Act of 1933. The definition of a Promoter is very broad; it includes anyone who is connected with the enterprise they are endorsing. There are solid legal arguments to be made that simply owning a company’s coins or tokens does not make someone a “promoter,” and that certain ICOs are not “securities.” However, to avoid enforcement action, anyone who was paid by the ICO should be very careful to either disclose his or her compensation, or not say anything that could be considered touting or paamping.
The SEC typically considers a promoter as someone who publishes information about a stock that is designed to increase the price and volume. Specifically, a promoter is defined as follows:
(i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or
(ii) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.
Securities Act of 1933, Rule 405, 17 C.F.R. § 230.405.
Under Section 17(b) of the Securities Act of 1933, a stock promoter is required to publish information that provides a full disclosure of their compensation, including the type and quantity of compensation received — such as the amount of tokens, equity, or cash. The statute reads:
It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.
Securities Act of 1933, 15 U.S. Code § 77q.
Failing to adequately disclose compensation for promotion can result in serious fines. The fines can range based on the frequency and severity of the actions. See SEC v. EquityAlert.Com, Inc. and Harmel S. Rayat, CIV 00–1469 PHY ROS, USDC, District of Ariz.) ($20,000 fine issued for violations of 17(b) compensation disclosure). See also SEC v. Merger Communications, Inc., Jukka U. Tolonen, and David A. Drake, Defendants, Civil Action No. H-00–2791, (USDC, SDTX/Houston) ($50,000 civil penalty for violation of anti-touting provisions). In April 2017, the SEC announced it would take enforcement action against alleged stock promotion schemes, and the fines varied between $2,200 and $3 million. See https://www.sec.gov/news/press-release/2017-79
The overarching goal of these promoter regulations is to avoid pump-and-dump schemes, which the SEC considers to be securities fraud. A pump and dump takes place when a promoter attempts to artificially inflate (paamp) the price through false and misleading positive statements so they can sell their cheaply purchased security at a higher price, aka the dump. Once the insiders dump, the rest of the investors — the main street investors — are left with an expensively purchased security that is now valued at a much lower price. This is also known as “holding the bag” or getting “rekt.” Pump and Dump schemes are considered securities fraud, and carry penalties of fines and/or potential misdemeanor or felony charges, depending on the extent of the scheme and the amount of money involved. See https://www.sec.gov/fast-answers/answerspumpdumphtm.html.
In conclusion, every time anyone discusses an ICO that they are paid to promote, they should disclose their ownership interest. A short disclaimer like this would suffice:
PROMOTER NAME was given (X) amount of (XXX) tokens in exchange for this pamp. These statements are for comedic relief only. Do your own research. You could get #rekt.