The SEC is making a public example out of boxer Floyd Mayweather and rapper DJ Khaled. The SEC announced last week that it had settled federal charges against the celebrities for illegally touting initial coin offerings or ICOs. The primary issue is that Mayweather and Khaled did not make public disclosures of payments they received for promoting the ICOs on their social media channels. Mayweather was compensated by three different ICO issuers, including $100,000 from the company Centra; Kahled also got $50,000 from Centra.
Severe Fines and Bans from Pumping Crypto
Altogether Mayweather agreed to pay a hefty fine of $614,775 ($300,000 in disgorgement, a fine of $300,000 and $14,475 in prejudgment interest). Khaled agreed to pay the feds a fine of $152,725 ($50,000 in disgorgement, $100,000 in penalties and $2735 in prejudgment interest). Mayweather is disallowed from promoting any type of digital or another type of security for three years. Khaled may not do so for two years.
Mayweather also agrees to continue to cooperate with the investigation, which could mean the enforcement net against anyone connected to Centra could continue to grow.
A part of the settlement, neither of the celebrities had to admit or deny wrongdoing. Interestingly, the SEC added specific social media posts in its press release about the matter. Khaled, the SEC wrote, called the Centra ICO a ‘game changer.’ Mayweather, on Twitter, told his millions of followers that Centra ICO starts in a few years and to get theirs before they sell out. He said that they could call him Floyd Crypto Mayweather from now on.
SEC Is Dropping the Hammer on ICOs
In an ICO, a cryptocurrency startup creates and markets its new digital token. Buyers pay for the token in either bitcoin or ether. In most cases, companies that create ICOs have not yet launched the product. It is easier to think of an ICO as a buying chip to be used in a casino that has yet to be built. ICO funding blew up in popularity in 2017 as an alternative method to traditional venture capital. But it has peaked and fallen back with all of the regulatory scrutinies.
Centra, the ICO that both Mayweather and Khaled promoted, did a $32 million ICO to launch what is called Centra card, a credit card to pay for things with bitcoin and ethereum. The founders of Centra have been indicted for wire fraud and securities fraud.
In a press release by SEC, the agency stated that these are the first cases to charge violations involving ICOs. In other words, this was the first time the SEC has brought charges only for promoting ICOs.
But experts say this is part of a bigger, ongoing crackdown on ICO fraud that has been in fact underway for more than a year, according to a recent Yahoo Finance fraud investigation. But only now is the crackdown seeing the light of day.
There are two necessary forms of enforcement going on in the ICO crackdown by the SEC. It first is going after ICOs that were clearly fraudulent or were engaged in fraudulent actions by those that were connected to ICOs, such as promising large returns, or dishonest sales and marketing. Also, it is attacking ICOs that failed to register with the SEC as securities offerings.
According to SEC Chair Jay Clayton, the SEC is making clear the agency’s firm view that most ICOs are securities and have to be registered with the SED, or qualify for an exemption by only selling the token to accredited investors, those with people with income of $200,000 or net worth of more than $1 million, or just outside the United States.
Clayton said if you are starting a venture, and you fund that venture by issuing tokens, you should assume that you are engaging in offering a securities offering.
The actions that have been taken against Khaled and Mayweather should put other celebrities on notice. If they have touted an ICO to their followers and promised or implied the token could rise in value, they could soon be facing the wrath of the SEC. Now that the SEC has finally defined ICOs as securities, we can expect to see more enforcement to prevent celebrities, influencers and crypto insiders from commiting fraud, which could cause major crypto markets to fall even more after a year of heavy losses.