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Introduction
Kim Kardashian and Lindsay Lohan—when most people think of these celebrities, they don’t think “crypto shill.” But the SEC has sued both for promoting crypto without disclosing that they were paid for doing so. And they are not alone in using their social media presence to influence financial decisions. Just as with food, fashion, and other industries, there’s a whole army of individuals dispensing financial advice on social media. These people are called “finfluencers.”
Some finfluencers are celebrities who already have a platform. Most finfluencers are regular people trying to gain a following. All finfluencers use social media to induce people to invest in whatever product they are promoting, often on platforms like TikTok.
TikTok was created in 2016, but the primary federal law regulating investment advice, the Investment Advisers Act, was passed in 1940. Since that time, the way in which investors receive financial advice has changed dramatically. The concept of finfluencers was inconceivable until relatively recently. Unsurprisingly, therefore, the extent to which the Investment Advisers Act governs finfluencers is unclear. Yet the stakes are enormous: the Federal Trade Commission found that, in the first six months of 2023, investors lost $2.7 billion from investment-related fraud scams initiated on social media.
Kim Kardashian is perhaps the most famous example of investor losses from “finfluencing.” The SEC sued her for promoting a cryptocurrency called EthereumMax on social media without disclosing that she had been paid to do so. The SEC alleged that Kardashian’s endorsement was part of a pump-and-dump scheme, where EthereumMax’s creators wanted to artificially inflate the price of the token before selling it to investors.
Although Kardashian is not famous for providing financial advice, many individuals have become famous on social media for doing just that, even though they also lack the requisite qualifications to provide financial advice to investors. For example, Ben Armstrong, known as BitBoy, developed a following of one million YouTube subscribers by making videos about crypto despite having no professional qualifications. He then promoted a new cryptocurrency called BEN Coin, whose value plummeted. Investors filed a class-action lawsuit against Armstrong, alleging that they were induced to invest by the promise of substantial returns but suffered significant losses through fraud.
Other individuals have gained a following on social media for reasons having nothing to do with financial advice and then used their newfound fame to promote financial products. Haliey Welch became an influencer after a clip of her being interviewed went viral, and after growing her brand online helped launch a cryptocurrency called HAWK. The coin lost more than 95% of its value in a single day when it was launched on December 4, and investors have filed a lawsuit alleging that the coin was sold unlawfully.
In light of the risks to investors that finfluencers pose, our ability to regulate finfluencers is essential to maintain trust and confidence in, and the integrity of, the securities markets.
