A Boxer, A Rapper, Twitter, and the SEC

December 10, 2018

No, they didn’t all walk into a bar. Instead boxer Floyd Mayweather, Jr. and DJ Khaled’s use of Twitter put them at the center of an increasingly hot area of securities law, initial coin offerings. These initial coin offerings find their origin in crypto-currencies, the most popular of which being Bitcoin. While crypto-currency in general is more akin to a non-physical form of currency, an initial coin offering is a form of crypto-currency more similar to an ownership share that has become increasingly popular lately. It’s likely this method has become so attractive because companies believe it is not subject Securities and Exchange Commission (SEC) and other regulatory and statutory requirements that come with publicly offering shares for sale. The SEC has come to believe otherwise.

Late in 2017, the SEC caught on to this practice and issued guidance in an investigation report on initial coin offerings offered by a business named The DAO.  In this report, they find the initial coin offering (also referred to as a token sale) at issue here was actually just a security offering because the token carried with it the right to share in profits and voting control of the company. Basically, while the DAO Tokens being offered were not explicitly labeled securities, they functioned as securities and were therefore subject to the same requirements as other securities.

Floyd Mayweather and DJ Khaled’s troubles began when they started using their Twitter accounts to advertise the initial coin offering from Centra Tech, Inc. in the form of Centra tokens. While this in and of itself is not necessarily a prohibited activity, they failed to disclose that DJ Khaled had received $50,000 from Centra Tech for his Tweet soliciting Centra tokens, while Floyd Mayweather pulled in $300,000 for Tweets and Facebook posts endorsing them and other unrelated initial coin offerings. He even went so far as to record and upload a video of purporting to use a credit card funded by crypto-currency. On November 29, 2018 they both agreed to settlements with the SEC for their conduct involved with these endorsements.

Their collective penalty including disgorgement for failing to disclose their compensation for these endorsements was over $767,000 (approximately $614,000 for Mayweather and $152,000 for Khaled). In addition to these penalties Mayweather agreed not to promote any additional securities for the next 2 years, Khaled agreeing not to promote for the next 2 years.  Mayweather has also agreed to continue cooperating with the SEC’s ongoing investigation into Centra Tech, Inc.

The investigation into Centra Tech not only involves their use of an initial coin offering to side-step securities requirements, it also involves their alleged false statements regarding nonexistent relationships with Visa, Mastercard, and The Bancorp for a credit card tied to crypt-currency wallets. This is the same credit card Mayweather was purporting to use in the video uploaded to social media. The civil complaint filed against Centra Tech by the SEC paints a picture of an entirely fabricated company which went as far as creating fictitious executive profiles on their website using pictures of family members. They are alleged to have taken in over $32 million with their scheme. Proceedings are ongoing in the Southern District of New York.

Sources:

SDNY Docket: Securities and Exchange Commission v. Sharma et al

SEC Release: SECURITIES AND EXCHANGE COMMISSION V. SOHRAB (SAM) SHARMA, ET AL.) (FILED APRIL 20, 2018)

SEC Release: REPORT OF INVESTIGATION PURSUANT TO SECTION 21(A) OF THE SECURITIES EXCHANGE ACT OF 1934: THE DAO

Reuters: Boxer Floyd Mayweather and ‘DJ Khaled’ charged by SEC over token offerings

SEC News Release: TWO CELEBRITIES CHARGED WITH UNLAWFULLY TOUTING COIN OFFERINGS

SEC Release: IN THE MATTER OF FLOYD MAYWEATHER JR., RESPONDENT.

SEC Release: IN THE MATTER OF KHALED KHALED, RESPONDENT.

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