Shaquille O’Neal is the latest celebrity to face legal trouble over promoting cryptocurrency on social media, joining the likes of Kim Kardashian and Tom Brady. Although the reasons for their lawsuits vary, the common thread is their involvement in crypto-related speech. The Securities and Exchange Commission (SEC) has aggressively targeted online communications related to securities, while several class action lawsuits have focused on athletes endorsing crypto companies or non-fungible token (NFT) projects, even when these endorsements might not technically violate securities law.
At the same time, the Federal Trade Commission (FTC) has introduced new rules banning fake reviews, misleading consumer testimonials, and the misuse of social media metrics like bot-generated followers. It’s uncertain how effectively the FTC will enforce these rules amidst the overwhelming volume of social media posts, and how this will impact crypto-related endorsements.
The Chilling Effect of Overregulation
This regulatory crackdown is concerning, not just because it ensnares so many individuals, but because it targets speech itself. With high-profile figures being penalized for crypto-related statements on social media, there’s a risk that these actions might stifle similar expressions from the general public. The question arises: How can social media communications be regulated to ensure compliance while still encouraging healthy discourse in the crypto space?
While regulations are necessary to prevent fraud and protect consumers, there’s a fine line between curbing deceitful practices and stifling legitimate speech. Overzealous enforcement could inadvertently suppress lawful expressions, particularly when the rules are unclear or inconsistently applied.
The Kardashian Case: A Turning Point?
One of the most high-profile cases involves Kim Kardashian’s promotion of EMAX tokens on Instagram. Despite including a #AD disclosure indicating that she was paid for the post, the SEC deemed her disclosure inadequate. Under federal securities law, promoters must clearly disclose the nature, source, and amount of compensation received for endorsements. Kardashian’s failure to meet these standards resulted in a settlement where she paid significant fines and agreed not to promote crypto securities on social media for three years.
Similar restrictions were imposed on musician Austin Mahone and NBA player Paul Pierce, raising concerns about whether these speech-suppressing mandates are constitutionally sound. Commercial speech, such as advertising, is protected under the First Amendment but to a lesser degree than noncommercial speech. Courts allow regulation of commercial speech, particularly when it is misleading or false.
The SEC’s stringent disclosure requirements aim to help the public distinguish between paid promotions and unbiased opinions, but they may be overly burdensome. By contrast, the FTC’s standards for social media influencers are less stringent, focusing mainly on transparency about relationships with brands. Had Kardashian’s case been evaluated under FTC guidelines, her #AD disclosure might have been deemed sufficient.
Towards a Balanced Regulatory Approach
To reduce confusion and ensure compliance, a uniform disclosure standard for crypto promotions could be beneficial. Simplifying the SEC’s requirements to align more closely with the FTC’s could enhance market transparency without placing an undue burden on celebrities or influencers. However, this would likely require legislative changes, which are notoriously difficult to achieve.
Alternatively, social media platforms could implement tools that make it easier to identify paid promotions, similar to Elon Musk’s controversial introduction of verification and content tags on X (formerly Twitter). These tools could increase transparency and help users comply with federal regulations.
The ongoing debate over the constitutionality of the SEC’s regulation of commercial speech and its speech bans warrants further scrutiny. Scholars have long questioned whether SEC disclosure rules infringe on First Amendment rights. As the crackdown on crypto-related speech continues, there’s a growing need for balanced regulations that protect consumers without unduly restricting free expression.
