Boxer Floyd Mayweather and Khaled "DJ" Khaled, a music producer, have settled charges issued by the US Securities and Exchange Commission (SEC) in connection to the promotion of Initial Coin Offerings (ICOs).
On Thursday, the US financial regulator said the pair have settled these charges, which relate to the failure to disclose payments made in return for the promotion of token sales.
Initial Coin Offerings are a means for cryptocurrency and blockchain-related projects to raise funds without the need for angel investors, banks, or traditional funding rounds. Would-be investors provide fiat currency or virtual coins such as Bitcoin (BTC) and Ethereum (ETH) in exchange for the project's own tokens.
While many ICOs are legitimate and may offer lucrative returns, a number of fraudulent scams and ICO schemes have left investors millions out of pocket.
Regulators are faced with a number of challenges. It has only been a recent development that ICOs were brought under US securities law -- and even then, only in some cases -- and without the need for ICOs to be registered, investments are put at risk.
In addition, attempting to enforce registration is difficult, as ICOs may be 'held' across country borders where these events have no local regulation to speak of, and as many fraudulent cryptocurrency companies have used fake names and addresses, tracking down scammers can be a very difficult task.
The problem is knowing which ICOs are legitimate, and which are scams. SEC has previously created a fake ICO landing page and guide to help would-be investors detect them, and has now begun taking celebrities to task for eliciting trust in ICOs without promoting the payments they receive for doing so.
The endorsement of products by celebrities has been used for many years in order to promote items and establish legitimacy. In this case, Mayweather and Khaled promoted three ICOs, including Centra Tech, but did not tell followers online that it was paid endorsement.
Mayweather received $100,000 from Centra Tech in return for promoting the firm's ICO, saying on social media channels, "Get yours before they sell out, I got mine.."
The professional boxer also promoted two other ICOs and tapped into would-be investor wishes for a return on investment by predicting he would profit from the events. A post on his Twitter feed said, "You can call me Floyd Crypto Mayweather from now on," -- and this promotion earned him a further $200,000.
Khaled, in return for $50,000, called the Centra Tech ICO a "Game changer" on Twitter.
Centra Tech later became the heart of a civil action lawsuit launched by SEC which alleges the entire scheme was fraudulent.
SEC alleges that the co-founders of the company, Sohrab Sharma and Robert Farka, lured investors with promises of innovative financial products, "created fictional executives with impressive biographies, posted false or misleading marketing materials to Centra's website, and paid celebrities to tout the ICO on social media."
Both Centra Tech executives were later arrested.
Neither Mayweather or Khaled admitted to the regulator's claims that they failed to reveal they were paid promoters. However, Mayweather has agreed to give up $300,000 in disgorgement -- otherwise known as profits allegedly illegally obtained -- alongside a $300,000 penalty and $14,775 in prejudgment interest.
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The case has hit Khaled's balance book hard, too, with the music producer agreeing to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest.
Mayweather has agreed not to promote any ICOs or securities for the next three years, and Khaled will also adhere to the same limitation for two years.
The investigation is still ongoing.
"Investors should be skeptical of investment advice posted to social media platforms, and should not make decisions based on celebrity endorsements," said SEC Enforcement Division Co-Director Steven Peikin. "Social media influencers are often paid promoters, not investment professionals, and the securities they're touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds."
Earlier this week, the CEO of AriseBank, a startup which promised to allow users to "act as their own bank" on the blockchain, was arrested and charged with stealing $4 million from investors. The firm's ICO was considered a scam by SEC and also used the tactic of celebrity endorsement -- in this case, American professional boxer Evander Holyfield.