Kim Kardashian is a celebrity influencer who is paid to endorse various products. In 2021, she shared a “hot tip” on Instagram about a cryptocurrency token, the EthereumMax token, using a post that enabled her followers to purchase the tokens directly and join an online Ethereum community. She did not disclose that she had been paid for the promotion, and ultimately incurred a $1.26 million fine from the Securities and Exchange Commission as a result.
FTC rules make clear that influencers like Kardashian must disclose when they are compensated for an endorsement. Less widely understood is that the SEC also regulates certain types of endorsements, and that its requirements are stricter. As a result, endorsers and the advertisers who work with them face at least two opportunities to make an expensive mistake.
Who Regulates Influencer Endorsements, and What Must Be Disclosed?
In Kardashian’s case, the SEC intervened because the agency regulates cryptocurrency promotion. Cryptocurrency and blockchain investing can be challenging to regulate because they are community-driven, but false and deceptive advertising practices and disclosure failures are exceptions. Kardashian’s omission violated the anti-touting provisions of the federal securities laws. Specifically, it violated Section 17(b) of the Securities Act, which requires anyone paid to endorse a security to disclose both the fact of payment and “the amount thereof.” The post was public, widely disseminated, and shared by a high-profile individual, making the violation easy to identify.
Her post may also have violated the FTC’s endorsement guidelines. The FTC makes clear that endorsers must disclose when they receive anything of value in exchange for a post, whether monetary compensation or non-monetary benefits such as free products. The SEC’s rules may be stricter, however, because Kardashian’s inclusion of “#ad” might have been sufficient for FTC purposes, depending on how visible the hashtag was.
Other regulators have also monitored the Kardashians’ endorsement activity. In 2015, the FDA sent Kardashian and Duchesnay Inc. a warning letter, after Kardashian promoted a prescription morning-sickness drug on Instagram without including information about risks and side effects. In 2021, Khloé Kardashian received a similar letter after endorsing a migraine drug from Biohaven Pharmaceuticals; the FDA asserted that her post included unsupported claims. As influencers play an increasingly significant role in marketing, they, and the companies that engage them, face growing regulatory scrutiny.
Regulation in Influencer Marketing and False and Deceptive Advertising
The influencer marketing industry is expected to reach $24.1 billion by 2025. With the FTC, FDA, and SEC each issuing and enforcing rules intended to protect consumers from deceptive advertising, the regulatory landscape is expanding rapidly. Influencer marketing functions much like traditional celebrity endorsements but takes place across a diverse set of digital channels and often involves individuals with smaller followings. Regulating these endorsements is complex.
Because influencers appear on platforms ranging from Instagram to Tumblr to Discord, and because advertisers increasingly target micro-influencers with higher engagement rates, tracking whether an endorsement is paid has become more difficult. While the Kardashians operate at the high end of the market and receive substantial compensation, companies are increasingly investing in everyday influencers to reach highly specific audiences.
As the number of influencers grows, additional litigation and regulation in the influencer marketing space are likely. If you are developing marketing or advertising campaigns and are interested in research to substantiate your claims, contact IMS Legal Strategies.
