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After Kim Kardashian’s SEC settlement, influencers working with brands could face more scrutiny – and fines

Influencer fraud
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After the U.S. Securities and Exchange Commission fined long-time, and billionaire, influencer Kim Kardashian for failing to disclose an Instagram endorsement paid for by a crypto company, some think the broader influencer sector could face more scrutiny.

On Monday, the SEC announced it had reached a $1 million settlement with Kardashian over her 2021 post promoting the crypto asset EthereumMAX. Although the post mentioned the often used “#Ad,” the agency said Kardashian should have also included that she was paid $250,000 for the post. As part of the settlement, Kardashian has agreed to also not promote any cryptocurrency for three years, according to the SEC, and will also be required to pay an additional $260,000 in disgorgement.

“The federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source and amount of compensation they received in exchange for the promotion,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement about the settlement. “Investors are entitled to know whether the publicity of a security is unbiased, and Ms. Kardashian failed to disclose this information.”

Although the fine is a drop in the bucket for Kardashian, it also opens new questions about whether federal regulators are more willing to go after social media influencers and celebrities alike.

Over the past few years, several celebrities have settled with the SEC after promoting cryptocurrencies without proper disclosures. In 2018, the agency settled with boxer Floyd Mayweather Jr. and music producer DJ Khaled after they failed to disclose their payments related to promoting Centra Tech, a company that was charged by the SEC with deceiving investors out of tens of millions of dollars as part of a proposal to create a virtual currency debit card. In 2020, actor Steven Seagal settled with the agency over failing to disclose payments from B2G.

Alexandra Roberts, a law and media professor at Northeastern University, said professional influencers like Kardashian know not to skip disclosures and should be penalized when they don’t. However, when it comes to micro-influencers, it should be the responsibility of the company hiring them to make sure they’re educated and that disclosures are in place.

“It’s a reminder to brands that there are rules and there will be scrutiny,” Roberts said. “And also a reminder to the general public that when you see people shilling these investment opportunities or brand that they’re talking about that you should think of them like you would think about traditional TV ads.”

In 2016, the group Truth In Advertising (TINA) released a report that found more than 100 instances where Kardashian and her celebrity sisters didn’t follow the FTC’s endorsement guidelines. More recently, TINA has investigated beyond the Kardashians. In August, the organization released a report claiming that more than a dozen celebrities have promoted NFTs on social media without properly disclosing their relationships with various companies and projects.

Laura Smith, TINA’s legal director, said it’s frustrating to see celebrities “continue to flout the law,” but also encouraging to see the SEC taking the issue of undisclosed promotion seriously.

“Deceptive marketing sells,” said Smith, adding that “until there are costs with deceptive marketing… if it’s still profitable, it will continue.”

Kardashian and Mayweather are also co-defendants in a class action lawsuit filed in January, which claims they—along with former Boston Celtics player Paul Pierce—promoted EMAX as part of a “pump-and-dump scam.”

“We see the SEC order as validation of the claims in the EthereumMax litigation, particularly those against Defendant Kardashian,” John Jasnoch, an attorney with Scott + Scott LLP, which is representing the plaintiffs in the lawsuit, in an email to Digiday. “Promotors who mislead investors should be held accountable.”

The fines come as another U.S. agency, the Federal Trade Commission, is considering updates to regulations for endorsements and testimonials related to products and services. (The FTC — which last updated its guide in 2009 before the rise of the influencer industry — had begun proposing chances in February 2020 but then paused during the pandemic.)

Some trade groups including the Association of National Advertisers and the Interactive Advertising Bureau say the FTC’s plans go too far. Others, such as the American Association of Advertising Agencies (the 4As), say they’re more in line with the proposals.

Lartease Tiffith, the IAB’s EVP for public policy, said that the trade groups have issues with how the FTC’s plans to require influencers to have disclosures that are “unavoidable,” arguing that the definition could be “pretty murky.” Instead, he said, the agency should rely more on the platforms and built-in transparency tools.

“For a lot of influencers, it’s a cautionary tale,” he said. “I think a lot of them get caught in a lot of the crypto NFT type promotions that a lot of people are doing and they have to realize they’re going to be held to a certain standard by the SEC.”

Ryan Detert, co-founder and CEO of the influencer marketing company Influential, said the FTC’s requirements are already clear and that disclosures are needed to maintain consumer confidence.

“Disclosure is a necessity for consumer confidence and to be FTC compliant,” Detert said. “These moments remind creators that with great power comes great responsibility.”

Influencers are responsible for properly representing themselves and the companies they work with, said Kyle Wong, co-founder and CEO of Pixlee, a content marketing startup. When they’re not transparent, he said they risk their own credibility and regulatory consequences.

“The majority of influencers aren’t celebrities,” Wong said. “They’re passionate content creators who have built an engaged community based on shared values. Those influencers who have worked to build relationships that emphasize transparency remain credible.”

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