How Investment Promoters Can Avoid Violating Securities Law

Musicians are increasingly lending their names to endorse products in exchange for financial compensation, sometimes related to music and sometimes not. Soprano Renee Fleming has collaborated with beauty companies. Lang Lang has lent his name to a limited edition Steinway piano.

Taylor Swift has partnered with Diet Coke, while Beyonce has endorsed Pepsi. Travis Scott has lent his name to a McDonald’s meal, while Megan Thee Stallion has lent her name to a hot sauce at Popeye’s. The artists' compensation for large promotional deals is sometimes announced, but even then, the public likely never knows the full details of the endorsement deals.

Another way musicians can make money is an arrangement like that offered by music company D'Addario, which collaborates with musical artists spanning many instruments, genres, and styles. Violinist/fiddler Mark O'Connor, smooth jazz sax player Kenny G, and country guitar player Keith Urban are among D'Addario's artist roster. Artists' financial arrangements with D'Addario aren't publicized, but all D'Addario artists receive free promotion on D'Addario's website.

Musicians aren't required to tell the public how they are compensated to promote most products. However, the situation is different in the securities industry. Securities laws and Securities and Exchange Commission (SEC) regulations require that individuals and companies paid to promote or sell securities disclose their compensation to investors. And the SEC considers cryptocurrencies to be securities.

In 2023, the SEC charged six musicians: DeAndre Cortez Way (Soulja Boy), Austin Mahone, Michele Mason (Kendra Lust), Miles Parks McCollum (Lil Yachty), Shaffer Smith (Ne-Yo), and Aliaune Thiam (Akon), along with two more celebrities, actress Lindsay Lohan and boxer Jake Paul, with illegally promoting crypto securities called Tronix tokens (TRX) offered by Tron Foundation (Tron) without disclosing the compensation they received.

All of the celebrities except for Soulja Boy and Mahone quickly entered into settlements when the charges were publicly announced. Collectively, those celebrities agreed to pay more than $400,000 to settle the cases against them. Surprisingly, the celebrities didn't take a lesson from Kim Kardashian, who, the year before, had agreed to a $1.26 Million settlement with the SEC on similar charges.

This article discusses securities laws regarding promotion (referred to as “touting”) and sales of securities, why the SEC brought charges against the celebrities, and what musicians and other celebrities should do to prevent facing similar charges.

Celebrities’ Charges and Settlements

Lohan's charges arose out of a single Tweet promoting a TRX offering, for which Tron provided the language. Lohan received $10,000 for the social media post but didn't disclose it. Lil Yachty also made a Tweet in exchange for $10,000 without disclosing his payment. Kendra Lust also made a Tweet using language specified by Tron without disclosing her $995 payment for making the tweet. 

Paul, Akon, and Ne-Yo were also paid for a Tweet with the language specified by Tron, but instead of cash, they were paid in crypto assets, with Paul receiving $25,019, Akon receiving $42,000,  and Ne-Yo receiving $12,000.

Mahone and Soulja Boy did not settle with the SEC administratively and went to court. Mahone lost his case and was ordered to pay $45,724. Soulja Boy refused to respond to the SEC’s charges altogether and had a judgment entered against him.

Don’t Tout Without Disclosing

All of the celebrities were charged with violating Section 17(b) of the Securities Exchange Act of 1934. That section prohibits the promotion of a security for compensation without disclosing compensation received (or to be received) for their activities. Section 17(b) isn’t based on fraud. Someone who publishes truthful information about a securities offering without disclosing the compensation they receive for the publication is violating securities laws.

When Section 17(b) was adopted, it was targeting people who were compensated for issuing stock tip sheets. However, the section has potential implications for Internet advertising platforms and even conferences that charge issuers a fee in exchange for the opportunity to tout their offerings. Section 17(b) also applies to broker-dealers and investment advisors, but they additionally are subject to FINRA and/or state regulatory requirements, which are beyond the scope of this article.

The bottom line is that anyone who receives compensation for promoting securities must disclose that compensation, even if it isn't conditioned on a successful sale.

Disclosure Isn’t Enough -Transaction-Based Compensation is Prohibited

The eight celebrities were paid for making the Tweets written by Tron; their payment wasn’t conditioned on their fans buying TRX. However, suppose a celebrity were provided fans with a custom link to buy TRX and the celebrity were paid an extra amount every time a someone bought TRX through the celebrity’s link. That also would have been illegal because it’s illegal for someone who isn’t a licensed broker-dealer to receive "transaction-based compensation,” even if the compensation is disclosed.

Transaction-based compensation is compensation based on the successful sale of securities. Transaction-based compensation may be a percentage of the dollar amount of securities sold or a flat fee for each successful investment. Any compensation conditioned on a successful sale of securities can be transaction-based compensation.

Transaction-based compensation need not be paid in cash. Transaction-based compensation could be crypto, a free rental, the use of a luxury vehicle, or any other item with monetary value. Even an issuer's bonus payment to salaried employees may be transaction-based compensation if based or conditioned on the successful sale of securities.

For years, the SEC has stated that receipt of transaction-based compensation is a hallmark of being a broker-dealer. So, anyone who receives transaction-based compensation must be licensed through FINRA.

What About Accuracy?

Suppose the celebrities had knowingly made Tweets about the crypto. Those statements would have been securities fraud and likely would have resulted in more significant consequences. Someone can be charged with securities fraud even if no one has bought securities based on false statements.

Rule 10b-5 prohibits misleading statements, misrepresentations, or omissions of material information in connection with the sale of securities. A simplified test for determining if information is material is whether an investor would consider the information important when deciding to invest.

Most investors would want to know if the person recommending an investment is getting paid for the recommendation. Knowing the amount of compensation helps the investor gauge the extent to which the payment might affect the promoter’s recommendation. So, the amount of the promotional fees paid to an individual that is selling or touting securities can be material. And not disclosing the fees or their amount can be securities fraud.

Even though none of the celebrities mentioned in this article were charged with securities fraud, Tron and individuals associated with the company were charged with fraud. Promoters might not know that they inadvertently relay false information about securities, but promoters do know how much they are being paid. So, promoters could, in a future case, be charged with securities fraud for not disclosing their compensation or misrepresenting the amount of that compensation.

Best Practices for Promoters

Securities promoters must provide complete disclosure of the amount and conditions relating to compensation paid for the endorsement, whether cash, crypto, equity, products, or anything else of value. Investors need to know the exact nature and value of the compensation arrangement to assess whether the endorsement is unbiased.

The disclosure should be provided in the communication containing the endorsement, which can prove challenging with a Tweet or other social media post with character limits. However, juxtaposing the disclosure with the endorsement should be a priority.

The disclosure should be written in plain, unambiguous language. A statement like “I was paid $10,000 in cryptocurrency to promote this investment” is sufficient. General phrases like “paid promotion” or “partnered content” don’t adequately describe the amount or type of compensation.

The disclosure must be prominent, in plain language, and easy to read. Promoters should avoid putting disclosures in fine print or a color that blends into the background or burying them beneath hashtags or lengthy captions. Placing the disclosure in the comments instead of the

Adopting a standardized disclosure format across platforms not only helps ensure legal compliance but also can reinforce branding for celebrity promoters. It also can build trust with audiences by making promotional relationships obvious and honest. For celebrity promoters, a reputation of honesty can help build their brand and attract additional high-quality promotional opportunities.

Most importantly, promoters should hire an attorney experienced with securities compliance to craft disclosures and review the promotion contract to ensure they comply with securities laws. Hiring an attorney in advance will cost the promoter less than hiring one after the fact to defend against SEC charges.

Best Practices for Issuers

Less well-established and smaller issuers and issuers of less conventional securities, such as crypto, often use promoters to market their securities. Promoter compensation is an ongoing challenge for many issuers. Promoters want to be paid. Yet, issuers may be hesitant to pay a promoter, especially one who isn’t a celebrity or influencer, until they have produced results. Plus, although some SEC guidance supports non-transaction-based compensation to finders, that practice has fallen into disfavor with regulators.

Many new companies enter into compensation arrangements that look like transaction-based compensation, if not with cash, perhaps by giving the promoter or finder stock in exchange for obtaining investors. Sponsors should disclose the compensation (or expected compensation) in the sources and uses of funds or use of proceeds section of their private placement memorandum or offering memorandum (PPM). This disclosure informs investors that those selling expenses will reduce the cash from the investment available to the issuer.

However, issuers should remember that disclosure in the sources and uses doesn’t inform the investor of any particular promoter’s involvement in the transaction. So, issuers must also make sure promoters disclose their compensation to investors. If the promoters' names and compensation aren't disclosed in the PPM, the issuer should require investors to acknowledge in subscription documents that they have been informed of the promoter’s compensation.

© 2025 by Elizabeth A. Whitman

Any references to clients and their legal situations have been modified to protect client confidentiality.

DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless a written contract is signed.