According to a recent report by Bloomberg News, the Federal Trade Commission indicated that it is investigating various crypto companies for their digital asset advertising. The FTC has not said what the exact focus of the inquiry is -- and, as expected, the FTC has not revealed who the targets of the investigation are.
This announcement comes on the heels of the widely-publicized collapse of the cryptocurrency exchange, FTX, and subsequent class actions brought over the company's and its endorsers' participation in large scale crypto ad campaigns. It also follows The White House's September 16, 2022 Fact Sheet, the "First-Ever Comprehensive Framework for Responsible Development of Digital Assets," which encouraged the FTC "as appropriate, to redouble their efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices."
The industry is also still reeling from the Securities and Exchange Commission's $1.26 million settlement with Kim Kardashian over her social media promotion of the EMAX token allegedly in violation of the federal securities laws.
This FTC investigation is the next significant chapter in the story. As the agency primarily responsible for enforcing federal consumer protection laws, the FTC is likely to play a key role as regulation of the digital asset space begins to take shape.
What is the FTC Likely Concerned About Here?
The FTC enforces the FTC Act, which is a broad statute that prohibits "unfair or deceptive acts or practices."
"Deceptive" practices are defined in the Commission's Policy Statement on Deception as involving a material representation, omission or practice that is likely to mislead a consumer acting reasonably in the circumstances. Here, while we don't yet know the facts of the FTC's current inquiry, it wouldn't be surprising for the FTC to focus on potentially false claims or omissions in the crypto companies' ad campaigns. This could include claims or omissions by the companies themselves, but also those of their endorsers (particularly given the FTC's consistent focus on endorsements, and their impending updates to the Guides Concerning the Use of Endorsements and Testimonials in Advertising).
An act or practice is "unfair" if it causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. As the White House noted in its Fact Sheet, the "rise in use of digital assets, and differences across communities, may...present disparate financial risk to less informed market participants or exacerbate inequities[, and thus] it is critical to ensure that digital assets do not pose undue risks to consumers, investors, or businesses." It is thus possible that, here, the FTC will be looking at potential injury to consumers, including whether any advertising at play irresponsibly took advantage of consumers' lack of experience with crypto assets.
What Should Digital Asset Companies and Those Working on their Behalf Do?
The FTC doesn't usually bring enforcement actions out of the blue. In our years of handling of FTC enforcement actions, what we've seen is that they almost always follow up with very public announcements, workshops, rulemakings, or other public action indicating that they are concerned about a practice. So, don't ignore the warning that the FTC is giving here. Now is the time to reevaluate how you're handling digital asset advertising. Here are some specifics to consider:
- First, the FTC couldn't be making itself any clearer that digital asset advertising is an issue of import for the Commission and that they plan to enforce existing consumer protection laws in this burgeoning space. If you are involved in advertising digital assets, it would thus be wise to consider: Do you have proper substantiation for all of the claims that you are making? Do your claims accurately reflect consumers typical experience? Are any material terms and conditions clearly and conspicuously disclosed, taking into account the FTC's latest statements about what it takes to ensure that disclosures are effective?
- Second, you should make sure your endorser practices are up-to-date. Do you have proper contracts with them? Are you ensuring that they are properly disclosing their connection to the company and are only making truthful claims? Do you have monitoring procedures in place to check on your endorsers? Are you considering other laws (such as securities laws) that may be implicated by your campaign?
- Third, if you do hear from the FTC, don't make the mistake that many do and fail to take it seriously. If you hear from the FTC -- formally (such as by a Civil Investigative Demand), or informally -- it's time to engage counsel and make a plan about how you're going to respond. Usually this initially involves promptly reaching out to the FTC to let them know you've gotten their inquiry and opening the lines of communication. Then, you'll ordinarily work with the FTC to develop a reasonable plan to get them the information they need. Of course, this is only the beginning of the process. But taking it seriously, reacting promptly, preserving your records, and working collaboratively with the FTC to address their concerns right away can go a long way to reaching a fair and reasonable resolution.
This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.
