SEC Fines Floyd Mayweather And DJ Khaled For Illegally Promoting A Fraudulent ICO
The SEC has fined two celebrities for failing to disclose payments they received for promoting initial coin offerings (ICOs). Professional boxer and promoter Floyd Mayweather paid a total of $614,775 in fines, disgorgement and pre-judgement interest, while music producer DJ Khaled paid $152,745. Both men settled out of court.
Mayweather and Khaled’s indictment principally relates to a cryptocurrency platform called Centra, which raised more than $32m from investors in 2017. Centra promised its investors that the funds raised in the ICO would be used to build a suite of financial products, including a debit card backed by Visa and Mastercard that would enable users to convert thinly-traded cryptocurrencies into U.S. dollars. But Centra had no relationship with Visa and Mastercard. The card was a sham, and the ICO was a fraud.
To promote their fraudulent ICO, Centra’s founders, Sam Sharma and Robert Farkas, had built a flashy website featuring endorsements from celebrities, whom they paid to promote their token on social media. Two of those celebrities were Floyd Mayweather and DJ Khaled.
On April 2nd, 2018, the SEC closed Centra down and filed criminal charges for fraud against Sharma and Farkas. “We allege that Centra sold investors on the promise of new digital technologies by using a sophisticated marketing campaign to spin a web of lies about their supposed partnerships with legitimate businesses,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, in a press release at the time. “As the complaint alleges, these and other claims were simply false.”
Now the SEC has also indicted Mayweather and Khaled. But not for fraud; the SEC seems to think that they were as deceived as the investors they were hired to dupe. Rather, the SEC has penalized them for failing to disclose the fact that they were paid to promote Centra’s ICO. “With no disclosure about the payments,” said the SEC’s Stephanie Avakian, “Mayweather and Khaled’s ICO promotions may have appeared to be unbiased, rather than paid endorsements.”
To be sure, even if the two had not been paid for talking up Centra’s token, they still might not have been giving unbiased advice. Talking up a security to attract investors, with a view to selling out quickly when the price rises, is characteristic of pump-and-dump schemes, and these are all too common in the cryptocurrency world. Crypto Twitter is awash with shills talking up coins. No-one with any sense takes any notice of them, but sense is in short supply among crypto investors. An awful lot of money has gone into dodgy ICOs. Most of that money will never be seen again.
It is also hard to see why two men whose net worth must be in the $millions would have been motivated by the money. Perhaps the real attraction for them was being at the forefront of the fashionable crypto revolution. This is certainly what Mayweather’s comment that he could now be called “Floyd Crypto Mayweather” seems to suggest. It’s all rather pathetic for a man who has had such a stellar career.
Nonetheless, Mayweather and Floyd did accept money to promote Centra’s fraudulent ICO. And Mayweather also promoted two other ICOs, also for money. Both men have now agreed not to promote any more ICOs, and the SEC says that Mayweather will “continue to cooperate with their investigation.”
This is presumably a reference to the SEC’s ongoing investigation into the legality of ICOs. The SEC’s report into the failure of the DAO, referenced in the press release, concluded that the DAO’s tokens met the definition of securities according to the Securities Act 1933 and the Securities Exchange Act 1934. And it warned:
Those who offer and sell securities in the United States must comply with the federal securities laws, including the requirement to register with the Commission or to qualify for an exemption from the registration requirements of the federal securities laws. The registration requirements are designed to provide investors with procedural protections and material information necessary to make informed investment decisions. These requirements apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.
In other words, calling something a “coin” or a “token” doesn’t mean it is exempt from the law. If it meets the definition of a security under the U.S.’s securities laws, it must comply with those laws. By issuing unregistered tokens, the DAO had broken the law.
Since that report was issued, the SEC has been examining ICOs to determine whether the coins or tokens meet the definition of a security. If, in the SEC’s opinion, they do, and the issuer has not registered with the SEC, the issuer has committed a crime. On November 16th, 2018, the SEC fined two cryptocurrency startups, Airfox and Paragon, $250,000 each for selling unregistered securities. Both will have to return to investors all the money they have raised so far, and they must now register their tokens as securities and file periodic reports with the SEC.
Mayweather and Khaled are not the only celebrities who have promoted ICOs. The SEC will no doubt investigate other celebrities in due course. Paris Hilton, perhaps. Though she insisted her promotion of LydianCoin on social media was “not an ad.” And LydianCoin’s founder seems to have gone to great lengths to try to ensure the SEC won’t class it as a security. Hmm.
Clearly, the sort of penalties imposed by the SEC won’t hurt celebrities much. But the damage to their reputations might. Mayweather and Khaled were duped by a pair of hustlers. They are no doubt extremely embarrassed. Though not nearly as embarrassed as the investors in Centra, who lost all of their money and may never get it back.
The lesson for would-be coin investors is – always do your due diligence, and never allow yourself to be swayed by fast talking from a shill on social media. Even if the shill is a celebrity you admire. Celebrities can be fools. You don’t need to be taken in by them.