Stock Promotion and SEC Enforcement
Companies in different fields rely more and more on online marketing to promote their business.  An increasingly popular and widely used online marketing tool is hiring spokespeople with significant social media presence, who have large number of followers (i.e., “influencers”).  It is important to keep in mind that the federal securities laws apply to those practices and are relevant both to the influencers and the companies wishing to promote their stock.  Both need to make sure that appropriate disclosures are made with respect to such promotions.  Specifically, when an influencer is promoting a security, the fact that it is receiving a compensation for it, as well as the amount of the compensation need to be disclosed.  The goal of the regulators is to ensure that investors are aware whether the promotion has been paid for or whether it comes from an independent unbiased party.

Section 17(b) of the Securities Act of 1933, also known as “anti-touting provision” prescribes that if someone is hired to promote a security, it has to disclose the nature, source and amount of such compensation, whether already provided or prospective.  

SEC considers digital assets to be securities and on March 22, 2023, it charged eight celebrities for illegally touting “Tronix” and “BitTorrent” crypto assets.  The owner of the companies as well as the companies themselves were charged with aiding and abetting these touting violations.  In this case, the owner of the companies in question has drafted or approved the content of each post published by celebrities, knowing that payments for such posts were not disclosed and specifically requesting that those would not be disclosed.

SEC has also recently settled enforcement actions against Kim Kardashian and former basketball player Paul Pierce for Section 17(b) violations. Both have shared promotional posts regarding crypto asset offered by Ethereum Max with their followers on social media, without disclosing the fact of compensation and the amount of compensation for such promotion.  

While these recent cases deal with crypto assets, in general Section 17(b) applies to securities issued by publicly listed companies.  For instance, stock promotion firms engaged by companies to produce and distribute promotional materials about issuers also need to disclose that they are compensated by the issuers.  Either a stock promotion firm or an individual making a communication about an issuer’s security, must state that it was paid to make such communication, disclose the amount of the payment and whether it was made in cash or securities.

Recent enforcement actions emphasize SEC willingness to enforce touting violations and apply charges for aiding and abetting against the companies. Publicly traded companies hiring individuals, especially high-profile social media personalities, or stock promotion firms, should be vigilant with about compliance with Section 17(b) requirements, since in addition to reputational risks, they can also be charged for aiding and abetting violations of Section 17(b).  

*The contents of this message, current at the date of publication, are for reference and general informational purposes only and do not constitute legal advice.  You should contact your attorney to obtain advice with respect to any particular legal matter.  You should not act or refrain from acting on the basis of information in this publication without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.   
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