There is an endless array of social media personalities all over every media outlet possible discussing every facet of the crypto industry and the nascent roiling markets. Many of them are sincere, honest, and well-meaning, while probably just as many are unscrupulous, unethical, and highly untrustworthy. How to spot the fraudsters, the scammers, and the pump and dumpsters? There is no easy way, except that there are certain mandatory disclosures required from paid sponsors, which is a good way to gauge conflicts of interest. The track record of a given marketer should be evaluated, as well as the specific statements of that marketer regarding the promoted product/investment.
Firstly, Section 5 of the FTC Act prohibits deceptive advertising, which grants the FTC power over crypto marketers, bloggers, influencers, and similar media personalities (and any other media advertising). While non-paid advertising is not required to be disclosed before or during the ‘pitch’ or interview of a new coin or token, this is still good policy to mention. All paid advertising where the marketer receives anything of value must be disclosed to the audience by law.
Violations of this requirement does not result in a fine, but may result in law enforcement action enjoining the activity and requiring disgorgement of any ill-gotten gains obtained as a result of the deception. The threshold for regulatory legal action is likely a sufficient number of consumer complaints about a particular marketer. Legal action may also take the form of civil litigation by consumers, such as that recently initiated against Mark Cuban for pushing the now bankrupt Voyager platform.
A verbal statement that the marketer is being compensated for discussing, interviewing an insider, or mention of a crypto asset is sufficient, otherwise a bottom of the screen written disclosure during or before the promo would also get the job done. Again, if no compensation is occurring, it is still a good idea to mention that in order to fully disclose the relationship with the crypto asset issuer. If it widely and publicly known that a marketer is a paid endorser then no disclosures are needed in the first place.
Obviously, all statements made with respect to a given project must as truthful as reasonably possible. If the marketer has reason to know that what he/she is saying about a crypto asset is false, that would also potentially violate the FTC Act and subject the marketer to sanctions and civil liability. The marketer does not have to go in depth into ascertaining the truth or falsity of his/her statements, such as visiting the headquarters, examining the crypto asset code, reviewing the backgrounds of the developers, and otherwise checking the financial statements of the marketed crypto asset; however, clear and obvious signs of fraud or rug pulls may be evident with a cursory review of a project, its whitepaper, and its web site. If the marketer obtains material knowledge raising clear red flags about a project, the risk from that endorsement is not likely worth the trouble of continuing forward.
If the team is anonymous, the issuer is registered in a small unregulated jurisdiction, it its bank account is in a non-first world jurisdiction, its code is in development or inferior (the platform is not substantially operational or bare bones), the crypto asset has no obvious use case, there have been no 3rd party, independent, pre-seed, seed or venture capital funders, there have been no reviews or professional crypto expert opinions issued regarding the project, and similar red flags, then the marketer would be well advised to stay away from such assets. An easy preliminary application form asking the above and other similar questions would quickly flag projects that should not be pushed to the public and cause potential liability for marketers.
Other issues facing crypto asset marketers would be whether they may potentially be advertising unregistered securities or commodities. This issue is probably more serious than the issue of disclosure of compensation as selling unregistered securities/commodities to the public may result in fines, cease and desist orders, industry bans, and potentially criminal and civil actions in some cases. Whether a crypto asset is a security/commodity is a legal question and a written attorney opinion prior to a public advertisement may be good evidence that such an asset is or is not a security or commodity. If the asset is being sold under an exemption such as Regulation D or a Reg A offering, then any advertisement must clearly have the required disclosure statement that the advertisement is not a solicitation and only accredited investors or otherwise qualified screened investors may participate in the offering after verification of their qualifying status. A ‘forward-looking statement’ disclaimer is usually a good idea, as well.
Selling securities or commodities involve issuer registration with their respective regulator, such as CFTC or SEC, and disclosure of all compensated relationships with public solicitors of investments, or as mentioned above exemption from registration under Reg D, which has its own rules for advertising and investor screening. In addition to federal laws, state laws may also deem a given project a security, since state laws are sometimes extremely broad. There are 50 regulators and care should be made to avoid certain states from advertising, such as NY for example, which is extremely oppressive in enforcing their overly broad regulations, and a statement excluding certain states from investment should also be made or shown in printed form during the promo.
This situation leaves only pure utility crypto assets which may be openly advertised for sale to the public, and per the statements of various regulators, there are few if any such assets around.
Finally, the marketer should, in any case, make the disclosures that he/she is not a financial advisor, planner, analyst, accountant, legal counsel, nor has any kind of duty, obligation to, or relationship with respect to the public at large and no fiduciary obligation is owed to the viewer of the promo. The marketer should state that no verification of his/her statements regarding the project has been made (unless there has been verification, in which case the extent of it should be disclosed), and it is the investors’ own responsibility to conduct their diligence with respect to any project and make their own decision whether to invest in it or not, after consultation with their own independent professional advisor. These would be the minimum disclaimers that should be used by marketers.
Any paid advertiser should, in any case, be viewed with distrust, whether the compensation is disclosed or not; this is merely common sense. At some point the onus shifts to the investor to use their own faculties to evaluate whether a recommended investment is prudent or not, and an investor would be well advised to consult with a professional who regularly conducts due diligence with respect to many types of investments, and is in a far better position to gauge the risk profile of a project. The upfront costs of such review and consultation are negligible in contrast to the potential losses involved in being the victim of a scam, weak or abandoned project, which may also be sold in contravention of various laws.
