The FDC Demands Celebrities to Disclose Endorsement Deals


Boxer Floyd Mayweather is very rich. This summer he became richer still by promoting “initial coin offerings,” which invite people to purchase digital tokens in exchange for online services—but are also a controversial type of speculative investment.

Mayweather is not the only famous figure to get in on the ICO fad. Hotel heiress Paris Hilton is also promoting the digital coins, while a famous soccer player is too. Their involvement is on one hand just another form of celebrity endorsement. But there’s an important difference: The celebrities, whether they know it or not, risk tripping over federal securities laws and, according to legal experts, putting themselves in possible legal jeopardy with the SEC.

50 Cent’s Penny Stocks to Paris’s Lydian Coin

Certain celebrities will put their name on just about anything. It can be a junky hair product or a caloric breakfast cereal—some stars don’t care as long at it earns them money. But as 50 Cent discovered, the rules are different when it comes to the stock market.

The company beyond LydianCoin is an advertising-tech firm run by a CEO who in 2011 pled guilty to beating his girlfriend. Its business plan for the ICO proceeds appear ambitious, but also indecipherable. Here’s how the Financial Times describes it (subscription required):

The digital advertising business claims to be “the world’s first A.I. big data marketing cloud” and is raising $100m (!!!) through the sale of Lydian “tokens” to finance the development of… well, nothing really…

If the whitepaper is to be believed, the whole idea here is that people will pay for Lydian tokens and use them to buy advertising campaigns from LydianCoin, which in turn licences its technology, products and services from Gravity4. The money won’t be used for anything. It will just sit there, covering the enormous balance sheet liability this ICO will create for LydianCoin.

You see the pattern here: Obscure companies with little more than a white paper are springing up and raising millions of dollars on the Internet and—in at least some cases—with the assistance of a celebrity pitchman. The question is whether these offerings are legal—and whether celebrities like Mayweather face trouble if they’re not.

Martinez pointed to Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Securities Exchange Act—which forbid misrepresentations in the course of security sales—as potential dangers for Mayweather and others who make glib or inaccurate statements about ICOs.

“I think they’ll come to realize they’re in similar jeopardy,” Martinez says. “I think they’re in the SEC crosshairs.”

Original article:

Written by: Jeff John Roberts

InsightsShana Grossman