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Keeping up with Crypto Influencer Liability
Social media has become an incredibly effective marketing tool for all types of businesses. To appeal to social media users, businesses will often hire influencers to assist them in promoting their products or services. Influencers may assume that because they are simply a conduit for somebody else’s marketing, their liability may be limited. However, they could still be subject to legal claims from members of the public or regulators if their posts are considered false, misleading, or harmful. Similarly, the companies that engage the influencers can also be liable.
A boom in the number and value of crypto-assets, especially the pop culture phenomenon of non-fungible tokens (NFTs), has given influencers and corporate brands alike a very real financial opportunity to leverage their follower and customer bases with high-value crypto-assets. However, the volatility of the crypto market and ubiquity of scams, means that the space is ripe for financial loss. A raging bull market, now followed by another freezing ‘crypto winter’, has led to some recent high-profile litigation over the failure of some crypto projects, such as EthereumMax (EMAX), which has placed influencers and the laws which regulate them in the spotlight. Notably, in that case, celebrity icon Kim Kardashian was charged and recently pleaded guilty to an action brought against her by US regulator, the Securities Exchange Commission (SEC).
This article considers what New Zealand law could apply if a claim, similar to that of EMAX, were brought in New Zealand against a local Web3 project and local influencers, and provides a breakdown of the law which could apply.
Background to the EMAX collapse
EMAX describes itself as an ERC-20 token on the Ethereum blockchain, a “community token” which “acts as the gateway to the EthereumMax Ecosystem” and “entry point into an all-encompassing decentralised ecosystem that rewards its users for holding and participation”. EMAX operated in a similar way to other crypto perk packages and traditional credit cards, promising access to cultural experiences, discounts, VIP ticket packages, rewards, and other lifestyle benefits. However, EMAX did not become self-sustaining, and prices began to fall in June 2021 as first movers fled the currency.
In January 2022 Kim Kardashian, Floyd Mayweather Jr, Paul Pierce, and others were sued as part of a larger claim against EMAX. The claim alleges that Kardashian and her co-defendants collaborated with EMAX to “misleadingly promote and sell” EMAX tokens via social media advertisements. Promotions by the company included an Instagram post to Kardashian’s 250 million followers (see below). In essence, the claim alleges that EMAX executives, with the assistance of celebrities, operated a pump and dump scheme.
Pump and dump schemes
Pump and dumps are a form of fraud, relating to financial investments, where the owner of a cheap stock uses certain tactics or actions (such as making false and misleading statements) to increase the price of their stock before selling the cheaply purchased stock at a higher price. Once the operators of the scheme ‘dump’ (sell) their overvalued shares, the price falls and investors lose their money as a result of acquiring these shares at an over inflated price.
The prevalence of cheap money, promotions by celebrities and businesspeople, get-rich-quick ideals, and social media have created ideal conditions for such schemes to thrive. Such is their prevalence in the crypto space, they have even got their own crypto-specific name – ‘rug pulls’. The dramatic crash into insolvency of the world’s second biggest crypto exchange, FTX, is another perfect example, with celebrities and sophisticated investors alike losing significant sums of money. Closer to home, the media speculated that festival ‘Juicy Fest’, which used NFTs as tickets, could be a scam. It should be noted that rug pulls do have their own crypto-specific characteristics (such as pre-mining), but for those looking to contextualise these schemes through the lens of traditional securities fraud, ‘pump and dump’ is a useful synonym. Over the last few years, and particularly since the beginning of the COVID-19 pandemic, millions of dollars have been raised in this way from the public, largely without compliance with financial markets law or disclosure requirements.
Read more here: Keeping up with Crypto Influencer Liability
