The U.S. Securities and Exchange Commission is making an example out of boxer Floyd Mayweather and rapper DJ Khaled.
The SEC announced on Thursday it has settled charges against both celebrities for “unlawfully touting” initial coin offerings (ICOs). The main issue: Mayweather and Khaled did not disclose payments they received for promoting the ICOs on their social media accounts. Mayweather was paid by three different ICO issuers, including $100,000 from a company called Centra; Khaled also received $50,000 from Centra.
Hefty fines, and bans from pumping crypto
In total, Mayweather agreed to pay a fine of $614,775 ($300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest) and Khaled agreed to pay a fine of $152,725 ($50,000 in disgorgement, $100,000 penalty, and $2,725 in prejudgment interest). Mayweather may not promote any securities (“digital or otherwise”) for three years, and Khaled may not promote any for two years.
Mayweather also agreed to keep “cooperating with the investigation,” which may mean the enforcement net against anyone connected to Centra will keep expanding.
As part of the settlement, neither celebrity admitted or denied wrongdoing.
Interestingly (and, many readers may find, humorously), the SEC includes specific social media posts in its press release. Khaled, the SEC writes, called the Centra ICO a “game changer.” Mayweather, on Twitter, told his followers that the Centra ICO, “starts in a few hours. Get yours before they sell out, I got mine.” He also tweeted, “You can call me Floyd Crypto Mayweather from now on.”
The SEC is fully cracking down on ICOs
In an ICO, a cryptocurrency startup creates and sells its own digital token; buyers pay for the token in bitcoin or ether. In the majority of cases, companies that do ICOs have not yet launched any product. You can think of an ICO as buying chips for use in a casino that hasn’t been built yet. ICO funding exploded in popularity last year as an alternative fundraising method to traditional venture capital, but it has since peaked and withered amid the regulatory crackdown.
Centra, the ICO that Mayweather and Khaled had promoted, conducted a $32 million ICO to launch “Centra card,” a credit card to pay for purchases using bitcoin and ethereum. The founders of Centra were indicted for wire fraud and securities fraud back in May.
In the SEC’s press release, the agency declares that these are its “first cases to charge touting violations involving ICOs.” In other words: this is the first time the SEC has publicly brought charges strictly for promoting ICOs.
But this is part of a larger, ongoing crackdown on ICO fraud — it is a crackdown that has been underway behind closed doors for over a year, as a recent Yahoo Finance investigation found, but the crackdown is now coming into the light.
There are two simultaneous forms of enforcement happening in the SEC’s ICO crackdown: it is going after ICOs that were blatantly fraudulent, or fraudulent actions by those connected to ICOs, such as promising big returns, or dishonest marketing; separately, it is going after ICOs that did not register with the SEC as securities offerings.
SEC Chair Jay Clayton has made clear the agency’s view that most ICOs are securities offerings and must be registered as such with the SEC, or qualify for a registration exemption by selling the token only to accredited investors (people with income of $200,000 or a net worth of $1 million) or only outside the U.S.
“If what you’re doing is starting a venture, and you’re funding that venture by issuing tokens you should start with the assumption that you are conducting a securities offering,” Clayton said at the Consensus: Invest conference in New York City this week.
The actions against Mayweather and Khaled ought to put all the other celebrities (and there have been many) on blast. If they touted an ICO to their followers and promised, or in any way implied, that the token would go up in value, they could be in big trouble.
Daniel Roberts covers bitcoin and blockchain at Yahoo Finance. Follow him on Twitter at @readDanwrite.