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Nonfungible Tokens, or NFTs, featuring cartoon images of idle monkeys, were lauded by Madonna. Tom Brady, the quarterback for the Tampa Bay Buccaneers, was featured in advertisements for the cryptocurrency exchange FTX, which abruptly shut down in November. Kim Kardashian also praised on Instagram about EMAX tokens.
Now, they and other famous people are being investigated by regulators for allegedly defrauding the investing public, as well as civil lawsuits from investors who experienced losses on virtual assets. The legal actions, which have led some agents to advise their clients against financial endorsements, may clarify the guidelines for cryptocurrency marketing and the requirements investors must meet in order to hold promoters accountable when investments don’t work out.
Tibor Nagy Jr., an attorney who represents both plaintiffs and defendants in the cryptocurrency field, asserted that “marketing a firm and promoting a security issued by a corporation are not always the same thing.” In the upcoming months, “we should anticipate court direction and clarity on the laws of the road for celebrities.”
During the significant cryptocurrency bull run in 2021, the usage of celebrity boosters intensified. The Super Bowl, the biggest marketing event of the year, featured notable celebrity cryptocurrency advertisements last year.
Celebrities discovered they might be paid just for endorsing a token, according to attorney Sean Masson of the law firm Scott + Scott, who has filed many proposed class-action lawsuits, without recognizing their obligations under federal and state laws governing endorsements and remuneration.
People are drawn to all the quick, easy money, according to Mr. Masson.
Celebrities joining the metaverse
One of his cases, filed in December, was directed at nonfungible token developer Yuga Labs. In addition to Madonna and a half-dozen other famous people, the lawsuit accuses them of breaking both federal and state securities laws by persuading investors to buy Bored Ape Yacht Club NFTs at artificially inflated prices while failing to disclose that they had received payment for their endorsements.
Madonna declared on Twitter in March that she had “finally joined the MetaVerse” while sharing images of herself with an ape named NFT. She allegedly received a Bored Ape Yacht Club NFT worth roughly $500,000 as compensation two months later, according to the lawsuit. The lawsuit claimed that she later pushed the NFTs in media interviews by claiming that she “was hellbent on getting an Ape.”
I finally entered the MetaVerse…,……….. My very own Ape! 🦧 Thanks @moonpay 🪄 We all need protection from Evil Eye. 🧿 pic.twitter.com/We5p9iy4hS
— Madonna (@Madonna) March 25, 2022
Madonna bought her ape NFT, according to a spokeswoman for the singer. According to a Yuga Labs spokeswoman, the claims made in the lawsuit are unfounded. The spokesman stated, “We have never paid anyone, famous or not, to join the club.
A federal lawsuit asserts that Mr. Brady and others’ celebrity endorsement of the now-defunct cryptocurrency exchange FTX encouraged investors to buy unregistered securities offered on the platform of the business.
According to plaintiffs’ attorney David Boies:
This was something where, in part because of the marketing, everybody assumed it was safe.
The lawsuit claims that although the defendant celebrities acknowledged their FTX agreements, by withholding information about the compensation they received in exchange for their promotion, they broke Florida securities and consumer protection laws. They are also charged with failing to do their homework before endorsing FTX products.
Mr. Brady’s attorney declined to comment.
In the latest round of lawsuits, plaintiffs assert a variety of legal grounds, some under federal law and others under state statutes that place restrictions on the sale of financial goods. State statutes that forbid unfair business practices have also been referenced in some lawsuits.
Laws governing the promotion of securities
According to the U.S. Securities and Exchange Commission, celebrities who advocate virtual tokens it considers securities are required to disclose the type, extent, and value of their payments. The commission, however, hasn’t explicitly stated its views on what digital assets are covered by these requirements outside of case-by-case enforcement actions, leaving the legal landscape unclear, according to attorneys.
The majority, if not all, of the most popular tokens haven’t received the SEC’s opinion, according to attorney Philip Moustakis, a partner at Seward & Kissel LLP. The markets and investors would both benefit greatly from greater transparency if they had done that.
A SEC representative cited the organization’s framework for deciding whether digital assets are securities, which is made available to the public.
Most recent lawsuits haven’t yet resulted in any important rulings. A federal judge in California, however, dismissed a proposed class action case against Ms. Kardashian and other celebrities, finding that the plaintiffs had not properly alleged that celebrity advocates had colluded with others to inflate the value of digital tokens.
According to U.S. District Judge Michael Fitzgerald
The court acknowledges that this action raises serious concerns about celebrities’ ability to quickly persuade millions of unsuspecting followers to buy snake oil with unparalleled ease and reach.
But while if the legislation establishes restrictions on such advertisers, it also expects investors to exercise caution before placing wagers based only on current events.
The attorney for Ms. Kardashian, Michael Rhodes, expressed satisfaction with the “well-reasoned verdict.”
The lawsuit, according to some defendants, did not demonstrate that investors had relied on celebrity endorsements. In a court filing, Ms. Kardashian’s attorneys stated that:
Crucially, no named Plaintiff contends that they in fact viewed either Instagram post before acquiring Tokens during the relevant time period.
The plaintiffs submitted an amended lawsuit that clarified their claims with the judge’s approval.
Celebrity endorsements of financial products could be risky, and some financial organizations themselves weren’t enthused about engaging in such partnerships before the crypto crash.
Tony Mulrain, co-chair of Holland & Knight’s sports legal group, said that:
There are a lot of guardrails put up when you start talking about money. Convincing your fans to purchase a particular brand of bleach is not subject to the same regulations as if this individual invested their entire life savings in a security because someone they respect and value said so.
There are numerous other product categories that offer marketing potential without the same risks, according to Leigh Steinberg, a sports agent who has worked with athletes like Patrick Mahomes, the quarterback for the Kansas City Chiefs. He said that it was possible to have a strong portfolio of marketing agreements without ever entering into riskier territory.
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