As if the cryptocurrency and Initial Coin Offerings (ICO) markets did not have enough to contend with of late and given bitcoin’s price being down around 75% since its peak in 2017, now the U.S. Securities and Exchange Commission (SEC) has announced charges against Floyd Mayweather Jr., one of the best defensive boxers in history, and music producer Khaled Khaled (aka DJ Khaled), have been settled for failing to disclose payments they received for promoting investments in Initial Coin Offerings (ICOs).
It is also hardly likely to reassure investors in the cryptocurrency space, already shaken since leading crypto currencies have fallen back to earth since last December. Nor - for that matter - potential new investors to the sector for that matter.
The settlements involving Mayweather - who apparently has the nicknames ‘Pretty Boy’ and ‘Money’ - represent the SEC's first cases to charge touting violations involving ICOs. They are also probably not the last given that the SEC looks at such ICO issuance retrospectively.
The SEC’s orders found that Mayweather, who was reported by Forbes to have made $285 million in prize money, salary, bonuses and endorsements between June 1, 2017, and June 1, 2018 (attributing $275 million of that to fighting Conor McGregor in August last year), failed to disclose promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc., and that Khaled failed to disclose a $50,000 payment from Centra Tech, which he touted on his social media accounts as a “Game changer.”
He topped the Forbes and Sports Illustrated lists of the 50 highest-paid athletes for 2012 and 2013, plus the Forbes list again in both 2014 and 2015, which listed him as the highest paid athlete in the world.
And, he had generated around 23.8 million Pay-per view (PPV) buys and $1.67 billion in revenue throughout his career, which put in perspective surpasses the likes of Mike Tyson, Evander Holyfield, Lennox Lewis, Oscar De La Hoya and Manny Pacquiao.
On one level you might argue that the settlements made by the two parties were more than what they gained in terms of the inducements, but has it gone far enough to dissuade others?
Moreover, is the settlement with the SEC really going to dent Mayweather’s financial standing - it represents around 0.11% of what his average weekly earnings were in the 12 months to June 1, 2018 (as cited above). And, after all it is not like he actually needed to rely on that extra cash.
Mayweather's promotions included a message to his Twitter followers that Centra's ICO “starts in a few hours. Get yours before they sell out, I got mine…”
And, a post on his Instagram account predicted that he would make a substantial amount of money on another ICO. In a post via Twitter it was stated: "You can call me Floyd Crypto Mayweather from now on." The SEC order found that Mayweather failed to disclose that he was paid $200,000 to promote the other two ICOs.
Mayweather and Khaled's promotions came after the SEC issued its DAO Report back in 2017 warning that coins sold in ICOs may be securities and that those who offer and sell securities in the U.S. must comply with federal securities laws.
Subsequently in April 2018, the Commission filed a civil action against Centra’s founders, alleging that the ICO was fraudulent. The U.S. Attorney's Office for the Southern District of New York filed parallel criminal charges.
Without admitting or denying the findings, Mayweather and Khaled agreed to pay disgorgement, penalties and interest in aggregate totalling $767,510.
In Mayweather’s case, the boxer agreed to pay $300,000 in disgorgement, a $300,000 penalty as well as $14,775 in “prejudgment” interest. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty and $2,725 in prejudgment interest.
In addition, Mayweather agreed not to promote any securities, digital or otherwise, for three years, and Khaled agreed to a similar ban for two years. He also agreed to continue to cooperate with the investigation, which is continuing.
Stephanie Avakian, Enforcement Division Co-Director at the SEC and formerly a partner at Wilmer Cutler Pickering Hale and Dorr LLP, commenting in the wake of the settlement said: “These cases highlight the importance of full disclosure to investors. With no disclosure about the payments, Mayweather and Khaled's ICO promotions may have appeared to be unbiased, rather than paid endorsements.”
Investors should be “skeptical of investment advice” posted to social media platforms, Steven Peikin, Enforcement Division Co-Director stressed.
A former Managing Partner of Sullivan & Cromwell LLP’s criminal defense and investigations group, where his practice focused on white-collar criminal defense, regulatory enforcement and internal investigations, he added: “They [investors] should not make decisions based on celebrity endorsements. 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."
SEC's Other Recent Actions
It has certainly been a busy November for the SEC in terms of actions. On November 28 the financial regulator charged self-described promoter Eric Landis from Charlottesville, Virginia, with micro-cap market manipulation scheme. Some two weeks earlier (November 16) two ICO issuers - CarrierEQ Inc. (Airfox) and Paragon Coin Inc - settled SEC registration charges and agreed to register tokens as securities.
Boston-based start-up Airfox raised around $15 million worth of digital assets in order to finance their development of a token-denominated “ecosystem” starting with a mobile application, which would allow users in emerging markets to earn tokens and exchange them for data by interacting with advertisements.
Paragon, an online entity, raised approximately $12 million worth of digital assets to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. Neither entities registered their ICOs pursuant to the federal securities laws, nor did they qualify for an exemption to the registration requirements.
And, among a total of seventeen similar SEC actions communicated during the month, on November 7 it was announced that Citibank N.A. was to pay more than $38.7 million for “improper handling” of ADRs (American Depositary Receipts), U.S. securities representing foreign shares of a foreign company, in relation to what were described “pre-released” ADRs.
On the same day brokerage ITG was charged with misleading dark pool subscribers with its POSIT dark pool and agreed to pay $12 million to settle. Furthermore, additional charges were brought against a New York boiler room scheme that targeted senior citizens and generated over $3.3 million of illegal profits (November 15).
Add to all the above, on November 8 Zachary Coburn, founder of EtherDelta, a digital token trading platform, was charged with operating an unregistered exchange (November 8), for secondary market trading of ERC20 tokens, a type of blockchain-based token commonly issued in ICOs. Over an 18-month period, EtherDelta's users executed over 3.6 million orders for ERC20 tokens, including tokens that are securities under the federal securities laws.
The SEC has previously brought enforcement actions relating to unregistered broker-dealers and unregistered ICOs, including some of the tokens traded on EtherDelta.
In light of this case, the SEC’s Steven Peikin noted at the time: “We are witnessing a time of significant innovation in the securities markets with the use and application of distributed ledger technology (DLT). But to protect investors, this innovation necessitates the SEC's thoughtful oversight of digital markets and enforcement of existing laws.”
Whatever else, the SEC has got its work cut out in monitoring the crypto/digital/DLT sector given all the aforementioned misdemeanors. If anything, this might point to increasing the levels of fines and settlements, as it would appear that adverse forces - or even bad actors - have been at work and it shows little sign of abating any time soon.
As Charles Hoskinson, formerly of Ethereum who in 2015 co-founded IOHK, a leading blockchain R&D company, who I recently caught with at the Malta Blockchain Summit earlier this November said in relation to investing in ICO’s: “Before purchasing an ICO, my first piece of advice would be to understand the project’s whitepaper and the product or service. The reality is that if you cannot understand the whitepaper then don’t buy into it.”
In addition, the American from Boulder, Colorado, whose IOHK team over the past three years designed Cardano, an industrial-strength blockchain and the home of the Ada cryptocurrency, stressed that potential investors "should never put more money into anything - ICOs included - than they can afford to lose and understand that these vehicles are tremendously speculative.”
Pretty sound and sensible advice there. And, of course do your own dilligence and be wary of celebrity endorsements spouting on about vast fortunes to be made in a flash. There are also various we If it is too good to be true, it probably is.
The SEC’s investigation concerning Messrs Mayweather and Khaled Khaled is being conducted by Alison R. Levine of the New York Regional Office and Jon A. Daniels, Luke M. Fitzgerald, and John O. Enright of the Enforcement Division’s Cyber Unit. The case is being supervised by Cyber Unit Chief Robert A. Cohen.
