Before Endorsing, Celebrities Should Know: Are Cryptocurrencies Securities? | Kaufman & Canoles

Even before the collapse of Sam Bankman-Fried’s FTX empire, the Securities and Exchange Commission (SEC) was paying increasing attention to the cryptocurrency market. Back in June, SEC Chairman Gary Gensler famously stated that crypto exchanges that do not cooperate with the SEC are “operating outside of the law.” The question of whether or not cryptocurrencies are securities was a central issue in the fraud class action lawsuit against Kim Kardashian, Floyd Mayweather and others, which was eventually dismissed. However, that lawsuit wasn’t Kardashian’s only crypto-related lawsuit; In October, the SEC indicted her for failing to disclose the payment she received for promoting EthereumMax’s tokens, which the SEC described in a press release as “crypto asset securities.” Kardashian was fined $1.26 million, which she paid.

However, following the collapse of FTX, the question came under renewed scrutiny. Another class action lawsuit was filed by investor Edwin Garrison against a laundry list of celebrities: Tom Brady, Gisele Bundchen, Steph Curry, Shaq, Udonis Haslem, David Ortiz, Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Larry David and Kevin O’Leary. The complaint specifically alleges that FTX offered and sold unregistered securities and that the named celebrities violated the same anti-publicity provisions of the federal securities laws that Kardashian violated.

So, as the above celebrities are no doubt wondering, are cryptocurrencies securities? It seems that in the world of crypto, dubbed the “wild west” of financial markets, the answer is…it depends. The Securities and Exchange Act of 1934 defines securities, but the Supreme Court case SEC v. Howey provides the test of application. The so-called Howey test states that an asset is an investment contract and therefore a security if: (1) someone invests money, (2) in a common enterprise, (3) with the expectation that they will benefit from it, (4 ) from the efforts of others. If a certain token passes the Howey test, it is a security under US law. The current SEC chairman believes that “most crypto tokens are investment contracts under the Howey test.” The answer to whether FTX’s high-yield cryptocurrency accounts qualify is a question that the celebrities named in Garrison’s lawsuit will await with bated breath.