Catch of the Week – SEC Hits Actor Steven Seagal for Improper ICO Promotion
This week’s Catch of the Week goes to the SEC for securing over $300,000 recovery from actor Steven Seagal in connection with his alleged failure to disclose payments he received for promoting an initial coin offering (ICO) conducted by Bitcoiin2Gen (B2G). The settlement is part of the SEC’s broader effort to combat the role of celebrities in promoting novel—and sometimes fraudulent—cryptocurrency investments.
Steven Seagal’s Promotion of B2G Tokens
According to the SEC’s order, B2G’s ICO involved digital tokens (“B2G tokens”) that B2G marketed as “the next generation of Bitcoin.” These tokens were investment contracts and therefore securities pursuant to Section 2(a)(1) of the Securities Act. B2G’s marketing materials stated that B2G would use the offering proceeds to build an “ecosystem” that would create demand for B2G tokens and up their value. The marketing materials assured investors that they would receive a guaranteed return each month.
The SEC’s order found that Seagal entered an endorsement agreement with the entity controlling B2G, where he would receive $250,000 in cash and $750,000 worth of B2G tokens in exchange for touting the B2G ICO. Pursuant to the endorsement agreement, Seagal extensively marketed the ICO throughout February and March of 2018, starting with a press release stating, “I endorse this opportunity wholeheartedly.” Seagal then took to Twitter and Facebook to encourage his millions of followers to invest. For example, on February 19, 2018, Seagal’s Facebook account posted a link to participate in the ICO and a promotional code along with a link to a B2G press release titled “Zen Master Steven Seagal Has Become the Brand Ambassador of Bitcoiin2Gen.” In total, Seagal advertised the ICO at least nine times throughout social media, but never once disclosed the compensation he received for doing so.
The SEC alleged that Seagal’s lack of disclosure violated the anti-touting provisions of the federal securities laws, namely Section 17(b) of the Securities Act, which prohibits any person from advertising a security in exchange for consideration from an issuer without fully disclosing such compensation. To settle the allegations, Seagal agreed to pay $157,000 in disgorgement plus prejudgment interest —representing the amount he actually received under the endorsement agreement—and a $157,000 civil monetary penalty. The settlement also precludes Seagal from promoting any securities for three years. Seagal neither admitted nor denied the SEC’s findings.
The SEC’s Crackdown on Celebrities ICO Endorsements
In recent years, the SEC has sought to better control the prominent role celebrities play in promoting ICOs—both legitimate and fraudulent. Seagal’s promotions took place just months after the SEC issued a public statement, SEC Statement Urging Caution Around Celebrity Backed ICOs, which cautioned celebrities and the investing public about the growing role of celebrity endorsements in the ICO market. In its statement, the SEC emphasized that it was taking a hard look at celebrity ICO endorsements and made clear that any “celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion” under the anti-touting provisions of the federal securities laws. The SEC also stated that celebrities could be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, or for acting as unregistered brokers. Likewise, the SEC cautioned investors to do their due diligence and not rely on celebrity endorsements when making investment decisions.
On the same day, the SEC issued an Investor Alert, Investor Alert: Celebrity Endorsements, underscoring the risk in following celebrity endorsements in the ICO market. The SEC made clear that “[c]elebrities, like anyone else, can be lured into participating (even unknowingly) in a fraudulent scheme.” It encouraged investors to do their research before investing and to never make an investment solely based on a celebrity endorsement or information received through social media.
Several months later, the SEC launched its own sham ICO “HoweyCoin,” as a tool to educate individual investors on the warning signs of a fraudulent offering. HoweyCoin.com promotes this fake ICO using numerous red flags associated with fraudulent offerings, including guaranteed returns, celebrity endorsements, and the ability to purchase investments using credit cards. Investors who attempt to buy HoweyCoin are instead redirected to educational tools published by the SEC and other regulators such as the Commodity Futures Trading Commission and the Consumer Financial Protection Bureau.
Given the SEC’s repeated public warnings regarding celebrity ICO endorsements, it is a safe bet that they will continue to closely monitor this area, and more celebrities could soon find themselves in the SEC’s crosshairs. Whether it is improper celebrity promotion or outright fraud, whistleblowers can play a critical role in exposing ICO misconduct through the SEC Whistleblower Program, which encourages those with knowledge of violations of U.S. securities laws to share this information with the SEC. Under the Program, eligible whistleblowers are entitled to an award of between 10 percent and 30 percent of the monetary sanctions collected in actions brought by the government.
- The SEC Whistleblower Program
- Financial & Investment Fraud
- Cryptocurrency Fraud
- SEC Launches “HoweyCoins.com” to Educate Investors on ICO Fraud
- The Constantine Cannon Whistleblower Team
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