On the one hand, cryptocurrencies have become a legitimate trillion-dollar asset class for investors and could reshape the financial services industry. But more than 46,000 people have lost over $1 billion to crypto fraud and scams since 2021. So, not surprisingly, legislators and regulators are scrambling to protect investors.
Over the past few years, celebrities have been caught in the crossfire with the Securities and Exchange Commission (SEC) pursuing household names like Floyd Mayweather Jr. and Kim Kardashian. But, more recently, a class-action lawsuit on behalf of FTX customers promises to push the boundaries of celebrity liability—and could cost them billions.
In this article, we’ll dive into the rules and regulations surrounding cryptocurrencies and whether celebrities could be liable for promoting failed crypto projects.
Are Cryptocurrencies Securities?
The case against celebrities hinges on whether cryptocurrencies are “securities.”
The SEC insists that crypto assets are “securities” subject to the Securities and Exchange Act and other regulations. If that’s true, anyone promoting a specific security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.
A failure to disclose these violates the anti-touting provision of federal securities laws. As a result, the SEC could charge these individuals with participating in an unregistered offer and sale of securities or acting as unregistered brokers.
However, whether cryptocurrencies are securities is up for debate.
The SEC has brought over a hundred enforcement actions in the past decade, claiming various cryptocurrencies are securities. But it has a mixed track record in court.
Ultimately, the court uses the “Howey test” to determine if something is a security. This test examines whether cryptocurrency constitutes an “investment of money in a common enterprise, with a reasonable expectation of profits to be derived from the efforts of others.” And that’s, of course, subject to interpretation.
In December 2020, the SEC charged Ripple with conducting a $1.3 billion unregistered securities offering, suggesting XRP was a security. However, in July 2023, a U.S. judge ruled that XRP was not a “contract, transaction, or scheme” that embodies the Howey requirements of an investment contract—and, therefore, not a security.
But, more recently, a U.S. judge granted a summary judgment for the SEC on its claim that Terraform offered and sold unregistered securities. The judge found that some Terraform tokens were “investment contracts” under the Howey test. While UST is not a security due to its stable value, the requirement to pool tokens with other depositors to generate returns based on interest rates made them securities.
The takeaway is that while all cryptocurrencies aren’t securities, specific cryptocurrencies certainly meet the definition of a security. So, until lawmakers draw a more transparent line, it will be up to courts to decide what meets the Howey test’s definitions on a case-by-case basis.
Where Does That Leave Celebrities?
The SEC was created in 1929 after the stock market crash to enforce laws against market manipulation. So, celebrities endorsing financial products that ultimately crash and burn—without disclosing they were paid—fit squarely within its mandate. It’s easy to see why the agency is aggressively pursuing these cases where individuals have lost money, potentially due to their trust in celebrities.
FTX’s collapse took a toll on the entire crypto market. Source: CoinDesk
On the other hand, it’s not apparent which cryptocurrencies may be “securities” given the SEC’s regulation-by-enforcement approach. Therefore, celebrities may not have a reasonable expectation to follow securities laws when promoting companies. After all, they wouldn’t be required to make similar disclosures when promoting a bank, credit card, or other financial products.
Despite the lack of regulatory clarity, one could argue that celebrities should have known they might be in hot water, given the SEC has been pursuing these cases for years.
As far back as 2018, the SEC pursued crypto promotion cases against celebrities like DJ Khaled and Floyd Mayweather Jr., although both celebrities settled without admitting or denying the SEC’s findings. More recently, in 2022, the SEC charged Kim Kardashian with touting a cryptocurrency, and she settled the case with $1.6 million in penalties. Similarly, Paul Pierce, an NBA All-Star, paid $1.4 million in fines.
What About Recent Class-Action Lawsuits?
The SEC continues to pursue its case primarily against crypto exchanges and protocols—along with a handful of celebrities—but class-action lawsuits are another matter. While their success hinges on the same principles as the SEC’s cases, they seek to recover damages for individuals harmed by their promotions. The potential damages could be far greater than what the SEC tends to pursue.
The current cases against Cristiano Ronaldo, Tom Brady, and others follow the high-profile collapse of FTX, Binance, and other major crypto exchanges. These lawsuits seek compensation for these losses and could translate to millions—or even billions—of dollars in settlements from these individuals if they’re found liable. Lawyers Adam Moskowitz and David Boies also lead the charge in Florida’s courts.
After announcing the lawsuits, FTX’s Sam Bankman-Fried and another high-profile former executive agreed to help go after celebrity promoters in exchange for dropping the class-action lawsuit against him. This assistance could include both testimony and providing documents in his possession to assist in their litigation efforts.
Thus far, a handful of celebrities have settled out of court, including NFL players like Trevor Lawrence and Rob Gronkowski. But others are still fighting back. Tom Brady’s lawyers argue that his general promotion of FTX didn’t mention unregistered securities, while other defendants insist that the Florida court doesn’t have jurisdiction. However, whether these arguments will hold up in court remains to be seen.
The Bottom Line
Every major crypto collapse has the SEC and investors scrambling to assign blame and recoup funds—and the collapse of FTX is no exception. While crypto remains in a legal gray area, there’s little doubt that celebrities will stay away from the asset class until more clarity follows recent SEC enforcement actions and class-action lawsuits.
However, Coinbase and other large exchanges continue to argue that the government isn’t doing enough to help clarify rules and regulations. They insist that the industry is willing to adhere to regulations if there are clear rules to follow. However, the SEC’s regulation-by-enforcement approach undermines that clarity. So, ultimately, it could be up to lawmakers and the courts to provide clear laws or enough case law surrounding crypto assets.
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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
