Public figures who promote cryptocurrencies and other digital asset projects could face significant liability under U.S. securities laws, according to a recent court ruling against Shaquille O’Neal.
His failed attempt to escape lawsuits by token holders highlights the risks in an evolving area of technology and law, lawyers say. Other celebrities, including O’Neal, Tom Brady, Gisele Bundchen, Stephen Curry, Naomi Osaka, Shohei Ohtani and Larry David, are facing similar support challenges in a separate lawsuit over the demise of cryptocurrency platform FTX.
“At the very least, this is a big warning sign for people considering going ahead with a project,” said Oleg Erknovich, a partner at law firm Susman Godfrey. “They have the same responsibility as anyone issuing a token.”
The lawsuit stems from the decline in value of Astral and Galaxy non-fungible tokens in the wake of FTX’s collapse in 2022. NFT holders filed a class action lawsuit against O’Neill in 2023 for selling unregistered securities, alleging that he founded the Astral Project and actively promoted its tokens.
The U.S. District Court for the Southern District of Florida said on August 16 that token holders had sufficiently alleged that former NBA star and sports analyst Jeff Brown was the “seller” of the Astral and Galaxy NFTs and that the tokens meet the definition of securities.
read more: Celebrities’ dismal record of endorsing cryptocurrencies
Judge Federico A. Moreno said O’Neill could be considered a seller because the complaint states he solicited people to buy the tokens. He cited a 2022 ruling by the U.S. Court of Appeals for the Eleventh Circuit. Wills v. BitConnect International PLCThe ruling held that not only traditionally permitted media such as newspapers and radio, but also public communications such as podcasts, social media and videos can serve as means of soliciting buyers under securities laws. wild The case concerned a non-celebrity promoter. Later that year, the Ninth Circuit joined the Eleventh Circuit in a lawsuit against a real estate investment and management company and its principals.
Adam Moskowitz of Moskowitz Law Firm, which represents the owners of Astrals and Galaxy, called Moreno’s opinion “the first comprehensive ruling on cryptocurrency and celebrity promotion” when it was released. O’Neal’s lawyers did not respond to requests for comment.
The decision also fills a void in a jurisdiction with a high number of these types of cases. “This decision comes from Miami,” Erknovich said. He noted that a number of digital asset projects are based in Miami, and that the court hasn’t ruled on many token cases to date.
NFL player Trevor Lawrence was one of seven alleged FTX promoters who agreed to settle investor claims in March, and Moskowitz said a global settlement is likely in the near future. In a separate lawsuit, Miami Heat basketball player Jimmy Butler and YouTube influencer recently agreed to settle allegations that Binance Holdings deceived customers into buying unregistered securities. The FTX vs. Binance lawsuit is also pending in the Southern District of Florida.
Valuable recommendation
Keith Miller, a lawyer at law firm Perkins Coie, said endorsement deals are often worth more than a celebrity’s salary, sometimes many times more. “They provide a significant economic incentive for them to promote products,” he said.
Media personality Kim Kardashian and former basketball player Paul Pierce settled with the Securities and Exchange Commission over comments they made about the EMAX token, but those settlements were “in separate contexts related to non-promotion clauses that require promoters seeking to promote a project to disclose compensation,” said William Krauss, a lawyer at Pearson Ferdinand LLP.
Miller said there is “regulatory uncertainty” when it comes to digital assets, and he is “optimistic that upcoming legislation and clearly articulated regulations and guidelines will provide much-needed guidance.”
Andrea Surratt, a lawyer at the law firm Crowell & Moring, said civil lawsuits against celebrities have become more active, using a variety of state and federal lawsuits. “It’s not surprising that plaintiffs’ lawyers assume that celebrities have deep pockets, especially in an area where the law is still developing,” Surratt said.
“If I were a celebrity, I would definitely consult with legal counsel before promoting crypto assets,” she said. “There’s room for celebrities in this space.”
New media, new products
The new ruling in the O’Neill case puts a spotlight on what constitutes a solicitation. “We think of a seller as someone transferring ownership of an asset, but under securities law, that includes someone soliciting a purchase for the benefit of a project,” Kraus said. “It has to approximate an invitation or persuasion to buy a digital asset, but it doesn’t have to be individualized. I think that’s the key point: Don’t say to a specific person, ‘William, you should buy this token.'”
“Of course, before they would point to radio ads and newspaper ads,” Kraus said. Courts are now more likely to point to YouTube videos and other online postings as enough to prove someone qualifies as a seller, he said.
Moreno also noted that NFTs could be considered securities, an issue that has led to mixed rulings in the courts.
“These particular NFTs, Astral, have indicia of a non-security and indicia of a security,” said Elkunovich, who practices plaintiffs’ counsel in the cryptocurrency space. “The court said the plaintiffs have sufficiently alleged that it may be a security,” he said.
Kraus noted the breadth of opinion on what constitutes a security. “The law is very broad in what constitutes a security under securities law, even when the ad doesn’t, on the surface, say it’s going to increase in price,” he said. Even statements about “network functionality” and “ecosystem growth” in blockchain-based cases can be used to show something is a security, he said.
With cutting-edge products, there’s uncertainty, so “there’s even more of an obligation to think about what you’re promoting,” Mr. Erknovich said.
The case is Harper v. O’Neal, S.D. Fla., No. 1:23-cv-21912, 8/16/24.
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