Pump-and-Dumpers Take Their Lumps: Influencer Liability Catches the Eye of Federal Regulators
By: Eric Ball , Kimberly Culp
Influencers and their large and impressionable followings have become a valuable marketing tool for brands big and small. However, brands and influencers alike should proceed with caution as regulators continue to scrutinize how influencers market information to their followers and how brands deploy influencer marketing. Recent enforcement actions have made one thing clear: disclose, disclose, disclose.
On December 14, 2022, the SEC announced charges against eight individuals for their roles in an alleged “pump and dump” scheme. Seven of the individuals are influencers who, the SEC alleges, used their large social media following of novice investors to manipulate stock prices for their own gain. The eighth individual is a podcaster who hosted the influencers and propped up their claims of investment expertise. He was charged with aiding and abetting the scheme. The alleged profits were substantial—the SEC estimates that the defendants brought in around $100 million. According to Joseph Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit, these “defendants used social media to amass a large following of novice investors and then took advantage of their followers by repeatedly feeding them a steady diet of misinformation[.]” The SEC drew up charges for securities fraud.
At the crux of the SEC’s case are allegations that the defendants purchased various stocks and then, while holding themselves out as expert investors, persuaded their followers to invest in those same securities. The SEC alleges that the influencers were disingenuous in their recommendations and used misinformation to convince their followers to purchase securities held by the defendants. All the while, the defendants were quietly selling off shares once volume or price benchmarks were achieved. The result was significant profits for the defendants with little regard to the financial well-being of their followers.
This is not the first time in recent memory that regulators have gone after influencers for misleading the public. Indeed, the FTC has announced guidelines and FAQs to assist influencers in understanding their rights and responsibilities when promoting products. While the FTC and the SEC regulate in different areas—the FTC is most commonly tasked with patrolling unfair competition while the SEC ensures a fair marketplace for stocks and other securities—both agencies seek to regulate how influencers market to their followers. Influencers most frequently run afoul of regulators when they fail to disclose their relationships with brands or misrepresent who they are or the interests that they represent.
Social media has become a powerful tool, but posts and tweets are often not only viewed by subscribers or followers. Federal regulators have made it a point to patrol these marketing cornucopias in search of unscrupulous marketing tactics. In recent years we have seen actions against YouTubers promoting their own brands and brands leaving phony positive reviews on their own products. Of course, self-promotion is not illegal. However, when brands or influencers conceal, either actively or passively, their ties with the product or security that they are promoting, they can run afoul of FTC or SEC regulations.
Fortunately, there are easy ways that brands and influencers can dodge this bear trap and still tap into the highly lucrative follower lists of influencers. The number one way to avoid liability is to disclose, disclose, disclose. The FTC guidelines come back to the act of disclosure more than any other preventative measure. Brands would be wise to create training programs for influencers that they partner with around the necessity of disclosing the relationship between the brand and the influencer and best practices for making these disclosures. These disclosures should be “clear and conspicuous,” near the endorsement where a reader will not miss them. Brands should avoid conditioning incentives on recommendations or reviews. If they do choose to condition incentives on reviews, they should both inform the customers that they must disclose this arrangement and make additional disclaimers informing the public that average reviews may be inflated due to the incentivized reviews. Do not ask employees to promote products or securities and remind them of their obligations to disclose their relationship with your brand if they do promote. The simple act of disclosure can often prevent a regulatory headache.
Of course, brands can engage with influencers for marketing partnerships and market through social media. Clever, well-thought-out marketing methods can be lucrative and mutually beneficial to both brands and influencers alike. Brands are free to run competitions requiring users to share social media posts promoted by influencers using “#contest” or “#sweepstakes.” Brands can host influencers on their own social media pages, welcoming the influencer’s followers while making it obvious that the influencer is being compensated for the promotion. Influencers can enter partnerships with brands to promote products using “#ad” or other clear indicators of a business relationship. Ultimately, brands are wise to be thoughtful, transparent and deliberate in how they utilize influencers to grow their customer base and promote their products. The alternative can be a multimillion-dollar judgment.
So, while the SEC’s complaint does not necessarily lay new ground regarding how to disclose a material relationship in social media, it is a good reminder of the financial exposure brands and influencers take when failing to follow simple practices such as:
Zack Kalinowski contributed to this alert.