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Celebrities Can’t Promote Stocks. Can They Endorse NFTs?

By Misyrlena Egkolfopoulou

 Hollywood stars are making a swift march into the NFT universe as regulators struggle to oversee the space. 

Hundreds of celebrities from Madonna and Reese Witherspoon to Paris Hilton and Justin Bieber, have bought, endorsed or invested in projects or companies that promote nonfungible tokens over the last year — in some cases sending the prices of digital assets soaring. 

LEXINGTON, KENTUCKY – NOVEMBER 20: Snoop Dogg of hip-hop supergroup Mt. Westmore performs at Rupp Arena on November 20, 2021 in Lexington, Kentucky. (Photo by Stephen J. Cohen/Getty Images) Snoop Dogg released his first NFT collection, “A Journey with the Dogg,” in March of 2021.

Now, all those Bored Apes, hopeful artists and profit-minded speculators clamoring aboard the Crypto Express are facing larger legal questions on how they promote their involvement in NFTs and whether they need to disclose paid endorsement deals.

“Celebrities and social media influencers have a lot of brand power,” said Bob Seeman, a tech and legal adviser and author of the book “Bitcoin: Unlicensed Gambling.” “But this is a whole new area with NFTs so the regulatory interpretation of it and how the regulators will treat it is unknown.”

A key legal question is whether digital assets including NFTs are securities, and therefore subject to the same rules as stocks. Separately, U.S. Securities and Exchange Commission rules stipulate that it is unlawful for any person to tout a security, like a stock, without disclosing a financial relationship or ownership to the source. In other words, celebrities that are being compensated would need to disclose their payment. 

The SEC could determine whether or not NFTs are securities, but the regulator has yet to disclose a case in which they have categorized the assets as such, according to John Reed Stark, former chief of the SEC Office of Internet Enforcement. That doesn’t mean the SEC is not investigating certain NFTs, he added. 

NFTs mostly therefore fall under the jurisdiction of the Federal Trade Commission, a civil regulatory organization that can issue warnings. In an email to Bloomberg News, FTC spokesperson Juliana Gruenwald reinforced that the agency assesses whether someone has not disclosed a paid endorsement deal — especially if it affects how consumers evaluate the endorsement. 

The NFT market exploded last year, drawing attention for multimillion dollar sales and buy-in from celebrities. About $44 billion worth of crypto was sent to smart contracts on the Ethereum blockchain tied to NFTs during 2021, up from $106 million the year before, according to data from Chainalysis.

To gauge celebrity interest in NFTs, look no further than the recent funding round announced by crypto-payment company MoonPay, which has focused on the checkout experience of buying and selling NFTs. On Wednesday, the company said that up to 16% of its $555 million initial Series A funding round came from musicians, actors and other personalities. Names include Ashton Kutcher, Bruce Willis, Gal Gadot, Gwyneth Paltrow, Jason Derulo, Mindy Kaling, Shawn Mendes, Matthew McConaughey and Steve Aoki.

For MoonPay CEO Ivan Soto-Wright, it’s clear why artists and musicians are so attracted to NFTs: Web3 and the blockchain technology that underpins NFTs have the potential to disrupt how creators and artists manage their royalties without the help of middlemen, he said. Soto-Wright compared this disruption to artists who got into streaming early and benefited as a result.

NFTs have the potential to change the way films are made, produced and distributed by allowing film creators to maintain their royalties and bypass Hollywood’s existing order of financing by selling tokens. This system would also allow films to be owned by fans, the NFT owners. 

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“If we have to summarize what are we trying to solve here, it’s ownership. We now have an opportunity to express ownership digitally,” Soto-Wright said. “The key word of this year will be royalties — the idea that you can take this intellectual property and you can monetize it.”

Regulators are left to make sense of it all. In March, Bloomberg News reported that attorneys at the SEC had sent subpoenas demanding information about certain token offerings as part of a larger effort to scrutinize creators of NFTs and crypto exchanges. The inquiry is the latest attempt by SEC Chair Gary Gensler to ensure the crypto market adheres to its regulations.

While the SEC has said that many tokens fall under its purview, some crypto enthusiasts argue regulations meant to police the equity markets shouldn’t apply to virtual currencies.

“You have a lot of gray area,” Stark said. “It’s a little harder with an NFT to prove that it’s a security and it’s always going to be on a case by case basis.”

As more high-profile figures enter the space, questions on whether celebrities are in fact paying in full for their digital goods, or simply promoting collections in exchange for money, have started surfacing. 

Justin Bieber joined the Bored Ape Yacht Club back in January, after purchasing an NFT from the collection for 500 Ethereum, or $1.5 million. Hours before his purchase, another wallet owned by the creators of another NFT collection, inBetweeners, dropped about 916 Ethereum into Bieber’s — which experts say raised questions about whether Bieber paid for his ape with money received from an undisclosed endorsement deal. 

Asked why the 916 Ethereum was transferred, a spokesperson at inBetweeners said Bieber was an owner in the project and that the Ethereum represented his proceeds from the “mint,” or the process of publishing NFTs on the blockchain. A representative for Bieber declined to comment. 

Madonna entered the metaverse last month, acquiring a Bored Ape NFT worth more than $500,000. Maverick, the firm run by her manager Guy Oseary, late last year signed Yuga Labs, the parent company of Bored Ape Yacht Club, as a client. 

That’s not to say that celebrities haven’t found themselves in trouble when promoting crypto projects that left investors with major losses. Kim Kardashian and Floyd Mayweather Jr. are being sued in a class action lawsuit for allegations that they promoted a little-known cryptocurrency called EthereumMax to their millions of followers on social media, artificially inflating its price. A few weeks after Kardashian’s endorsement, the token’s price plunged. 

More stories like this are available on bloomberg.com

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