Looks like my AI image generator is improving. No extra hands or fingers this time. All words spelled correctly. I'm so proud of my AI for growing up!.
I published a recent article that discussed the basics of marketing securities for Reg A, Reg CF and Reg D, Rule 506(c) online. I highlighted how marketing securities online is far different from marketing most other products and services because securities laws add additional roadblocks to overcome. We are all bombarded by ads online every day, but those marketing securities for private companies under the JOBS Act have to be extremely careful to not only follow "false advertising" laws from the Federal Trade Commission and state advertising regulators, but also the very unforgiving world of securities laws that ban false and misleading statements.
This follow-up article explores one specific area that can be very problematic for those marketing private company securities: the use of celebrities or influencers to promote your securities offering. This is an area you must approach with caution for many reasons, the least of which is that this kind of marketing can be very high profile and quickly get on the radar of securities regulators and others.
Need some examples? Here are some where the SEC got involved in celebrities promoting crypto offerings that provide a lot of guidance as to how they would handle a similar celebrity endorsement of an online securities offering:
In 2023, the SEC filed charges against a handful of celebrities including Lindsay Lohan, Jake Paul and Ne-Yo for violating laws for promoting certain cryptocurrencies without disclosing they were being compensated for doing so.
The SEC fined one of the most famous individuals in the world, Kim Kardashian more than. $1 million for failing to disclose that she was being compensated to promote EMAX tokens in her Instagram posts and banned her from promoting crypto asset securities for three years.
Also related to EMAX, former NBA star Paul Pierce paid $1.4M to settle SEC charges for touting the tokens on social media without disclosing the $244,000 payment he received for the promotion and for making false and misleading promotional statements about the crypto asset.
No, they didn't go to prison, but it did cost them a lot of money.
While these were all penalties against the celebrity in crypto offerings, the reality is the SEC went after these celebrities to prove a point not just in the crypto world, but also to send a message that applies to everyone who uses celebrities and influencers to promote anything that is related to the securities industry.
So let’s talk about some specific scenarios that your company could find itself facing.
If a Celebrity or Influencer Promotes Your Securities Offering On Their Own, You’re Probably Okay
I emphasize the word “probably” in that last sentence.
Then again, the chances of a huge celebrity or influencer randomly deciding to promote your securities offering on their own and without being paid are about the same as the chances of Santa Claus flying around with a banner towed behind his sleigh that says, “The North Pole Loves This Stock – Buy It Now To Stay Off My Naughty List.”
AI Santa seems to have way too many reindeer and his banner is defying all laws of physics, but you get the point.
There is a huge difference between a celebrity or influencer your company pays or otherwise compensates to promote your investment offerings, and those who do so on their own without compensation. If a celebrity or influencer promotes your company’s securities offering on their own with no compensation or ties to your company, you have no control over what they say and normally if they are completely unrelated to your company you do not have a duty to intervene. There are some exceptions, but basically you are generally safe from the securities regulators if your company is completely detached from whatever a celebrity or influencer posts on their own social media channels.
Remember, securities regulators and others who might want to cause problems for your company can generally only punish you for something you have control over. That’s not to say they won’t try to do something based on a celebrity or influencer posting you didn’t pay for if it’s so blatantly false and misleading that you should have known about it and should have done something. I’m not saying they would be successful coming after you. But if you know as a company there is something so clearly false and misleading that has been seen by millions of people, it could cost you a lot of money in legal fees just to defend the allegation that you should have done something in response.
Here is a made-up extreme example. Let’s say the most famous celebrity in the United States with 200,000,000 followers on social media posts a video saying “I just bought Company X’s stock at this link. I know from someone on the inside that they are about to get a government contract worth billions and they are going to hold an IPO in 6 months. This is the greatest investment opportunity I have ever seen. I’m certain my $500 investment is going to be worth $1,000,000,000 in less than a year. Everyone should go and buy this stock right now before it all sells out. You don’t want to miss out on being a billionaire in just a few months!”
I think it would be virtually impossible to have your company not hear from somebody, somewhere, that this post existed. Let’s also assume that what the celebrity said is completely made up. I wouldn’t say you have an absolute affirmative duty to reach out and ask the celebrity to take down the post and to establish a paper trail that you did not pay for or participate in the post in any way, but it sure seems like making that effort to reach out would come back later to help your company if someone comes knocking and asking questions. And, at the very least, you will likely have to address comments on your own social media, or if you were tagged in the post, comments on the celebrity’s social media. Setting the record straight is something that you should consider doing in those areas also.
If Your Company Pays or Otherwise Compensates A Celebrity or Influencer, There Are Many Legal Considerations
It is also a totally different story if the celebrity or influencer is being compensated (not just money – any compensation) by your company or is making the post in conjunction with your company in some manner even if not compensated. In that case, your company has a duty to be sure the celebrity or influencer does not say anything false or misleading and that they follow all of the rules of marketing securities.
If using paid or otherwise compensated celebrities or influencers, one of the biggest issues is full disclosure of the connection to your company and of any compensation. If your company is compensating the celebrity or influencer for their posts and endorsements in any way (not just money – any compensation) then extra care must be taken to (a) disclose that they are being compensated and the amount of the compensation in the post and (b) not do so in a misleading way.
For example, an influencer who is not an investor should not talk about “why I invested” and a celebrity who was paid to post on their social media or appear in marketing should not be made to look like they are doing this just because they love your company. Full and fair disclosure of the compensation arrangement is the best way to avoid problems here. Keep in mind – these types of posts and endorsements are very high profile and can catch the eyes of federal or state regulators very easily – so always err on the side of caution and avoid even the appearance of being misleading.
The primary federal securities law that applies here is Section 17(b) of the Securities Act of 1933. Even though this law was written 90 years ago to help consumers not be swayed by “tip sheets” from paid stock promoters well before television and the internet existed, it is still applicable and enforced by the SEC for all forms of “modern” marketing and advertising of securities. This law says:
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. (emphasis added)
Section 17(b) is not a very forgiving law. There isn’t any wiggle room. Look at the words above that I italicized. “Unlawful” means a crime and also can lead to civil liability. “Any means of communication” means literally everything from a spoken conversation to an email, from a highway billboard to a social media post, and from a text message to a Super Bowl commercial. “Or circulate” means to pass along the message – meaning even if you repost something or use a quote in an ad – putting you and the company on the hook if you repurpose someone else’s post or comment without disclosing the compensation. “For a consideration received or to be received, directly or indirectly” leaves no space to pay a third party who then pays someone else for the post (you can’t hire a social media company who then pays an influencer and then claim you did not compensate the influencer). “Without fully disclosing ... such consideration and the amount thereof” means you not only need to make it clear that the post is for compensation, but you also must disclose the amount you paid.
I have seen people try to find ways around these disclosures and I emphasize strongly that no company should take that risk. You can’t just have an influencer add #Paid to their post and get away with it, for example. You can’t just post generic language like “Celebrity X may have been compensated for this post” or anything so vague. This is a place where working with your legal counsel to craft the disclosures in a compliant manner is very important. Technically, something like this is a bare minimum starting point for what a post must contain to disclose the compensation – and you can imagine the buzzkill such legalese will do for a promotional post: “Celebrity X is compensated by ABC Corp. for publicizing its securities offering. The compensation is (explain amount and payment terms) and Celebrity X has been paid $_____ to date for the services provided.”
You Also Have To Worry About The FTC and State Regulators
This also gets us into another area. You not only have to be careful about the SEC and all the state securities regulators, but you also need to worry about the FTC (Federal Trade Commission) and state regulators who control deceptive advertising. The FTC has quite a few publications and videos available about deceptive advertising and social media influencer marketing. Two in particular that provide some helpful guidance are Disclosures 101 For Social Media Influencers and the “Advice for Influencers” short videos published by the FTC available on YouTube, and linked directly on the FTC website at this page.
Err On The Side Of Full Disclosure At All Times
It’s not just money and compensation that require disclosure. You can’t have your first cousin Brad Pitt promote your stock offering for free because of your close family relationship without disclosing that family relationship. If any financial, employment, personal or family relationship exists with your company, an influencer or celebrity must clearly and conspicuously disclose the relationship.
Always err on the side of full disclosure. Here are a few other examples of what the FTC and SEC and others may look at to determine compliance in this area that you may not have thought would be something you need to consider:
Each disclosure should appear close to the claim it modifies (the influencer’s content), and should be in a location where people are likely to see it.
The font color and font size of the disclosure should make it easy to read.
When disclosure is required, it should be clear and conspicuous on all devices and platforms on which consumers will view the content. If disclosure cannot be made clearly and conspicuously on a device or platform, that device or platform should not be used.
All opinions or claims made in the advertisements (the posts, videos, or other content shared by the influencer) must have a reasonable basis to support each claim. Anything stated as a “fact” must be 100% true and verifiable.
This applies not only to what the influencer says or writes, but also to what is implied – what a reasonable consumer may infer from the content, even if the influencer and your company did not intend to convey such claims.
It makes sense to have your company’s marketing and legal team review all public communications from paid influencers and celebrities and establish a review system before any posts or marketing occurs. I know from experience that influencers and celebrities may or may not pay attention to the guidance your company provides to them, and it is your company’s ultimate responsibility to be sure no false or misleading advertising occurs when paying people to market your securities. If using influencers or celebrities, your company must monitor influencer content for clear and conspicuous disclosures and for compliance with legal requirements.
Beware Of One More Thing...
If your company or any of its principals comment on or “Likes” online postings, or reposts the celebrity or influencer posting on your company’s own social media channels, or in any way reuses the celebrity or influencer post to market your securities, then your company “owns” whatever the celebrity or influencer has said and your company can be held responsible for those statements if they are false or misleading or otherwise in violation of securities laws.
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This article is not and should not be considered legal advice. Yes, I am a securities lawyer but no, you did not hire me to provide you with legal advice. In all cases, consult with your own lawyer as every legal situation is unique and do not rely on my educational and informative article as legal advice.