Why #NFA #DYOR Doesn’t Cut It

First published in BanklessDAO’s Decentralized Law, “Regulatory Certainty and the Rule of Law,” April 28, 2022.

Social media influencers have become a pipeline for branding, product promotion, and advertising campaigns to persuade the masses across a range of platforms. Advertising campaigns through social media are incessant and inescapable. This form of native advertising is designed to fit into the flow of content and can be difficult to discern. Due to limitations on where and how crypto projects can advertise compared to other industries, influencers arguably play an outsized role in advertising and promotion of crypto, DeFi, and Web3 projects. This in turn leads to what feels like an unreasonable amount of shilled promotional content where the business relationship between the brand and influencer is, at best, unclear. The lack of clarity can be particularly deleterious to new, or even experienced, crypto users and shines a negative light on the industry as a whole.

Most jurisdictions have one or more agencies mandated to ensure that advertising and promotion is truthful, not misleading, and in some instances is subject to explicit disclosures. In the United States, that agency is the Federal Trade Commission (“FTC” or “Commission”), which monitors advertising on television, radio, print media, and the internet. The Commission has asserted that most consumer protection laws implicated by advertising are not medium-specific; they apply not only to traditional advertising media, but also to native advertising and influencers on the internet. However, while the FTC Act’s prohibition on ‘unfair or deceptive acts or practices’ encompasses all forms of internet advertising, enforcement of violations of these standards seems to be sorely lacking, at least with respect to social media influencers.

Crypto Influencers: You’re Getting Paid?

What is an influencer? The name is generally self-explanatory and correlates with audience size and reach on various internet fora. FTC regulations require clear disclosure of any relationship with a promoted brand or project. The FTC’s Endorsement Guide, for example,  places the burden on influencers to make it ‘simple and clear’ when they have a relationship with a brand. For influencers, appropriate disclosures can include hashtagging ‘ad’ or ‘paid promotion’ in captions for posts endorsing goods or specific brands. However, a quick search of content by potential and actual influencers quickly reveals that appropriate disclosures are few and far between.

On-chain sleuth @zachxbt recently published a long list of known influencers crypto shills and the respective costs for their services.

Zach does caveat that not everyone on these lists does undisclosed promotions, but the ‘vast majority’ do. It is probably a good rule of thumb to take discussion or potential endorsement of new projects by large accounts with a grain or two of salt.

In the last several years, @zachxbt has been doing at least part of the FTC’s job by identifying scammers and warning of the dangers of unscrupulous influencers. For Zach a key issue is ‘not disclosing paid ads’. He says this is common in the crypto space and is increasing in the NFT space. Over time, @zachxbt’s threads have highlighted non-disclosure issues from crypto influencers like @moon_guurl and @HelloImMorgan, as well as more ‘mainstream’ influencers like Lindsay Lohan. George Floyd and Logan Paul’s involvement with the Bored Bunny NFT project is one of the more recent egregious examples of undisclosed shilling gone wrong, where the influencer promoters, whether gifted NFTs or paid in fiat as the tweet below suggests, clearly did not disclose their relationship with the project that ultimately rugged users for over 21 million USD.

Influencers posting about crypto or other financial products often try to limit their liability by including disclaimers like #DYOR (do your own research), #NFA (this is not financial advice), or similar. These ‘disclosures’ are seemingly meant to advise followers to be cautious. However, this type of disclaimer can at most only alert the audience the influencer is not a licensed financial professional who would be required to conform to specific standards when discussing financial products. Hashtagging #NFA or #DYOR like a mantra has minimal actual function, and does not in any way constitute, or eliminate, FTC disclosure obligations or related liability.

A recent article by @DazaiCrypto provides a good overview and further insight regarding some of the ongoing problems in the crypto-influencer community, such as failure to disclose affiliation with projects or pump-and-dump issues. If the FTC won’t regulate influencers, then disclosure of this type of information by individuals like @zachxb and @DazaiCrypto becomes increasingly important and necessary, particularly as crypto becomes more mainstream.

Podcast Ads

As with influencers’ social media postings, the majority of ads within podcasts come directly from the host, whether they are read live or pre-recorded. As with most native advertising, this form of communication can be particularly effective because listeners are generally more likely to believe something said by a trusted host as opposed to pre-produced ads from a company. Ads delivered in this way are likely to come across as testimonial by the host; the sense is that they believe what they are saying about whatever they are promoting. If there is a ‘material connection’ between a podcaster and the product or service — in other words, a connection that might affect consumers’ perception of the credibility of the endorsement — then that connection should be clearly and conspicuously disclosed.

Unfortunately, there are regular examples of non-compliant ads in the crypto podcasting community. Crypto podcasts, in particular, often discuss a variety of dApps, protocols, programs, brands, and projects. If the host is an investor, holds a significant position in the token or protocol, or acts as an advisor, any lack of disclosure, or even a discussion where the relationship is not apparent, likely violates FTC requirements.

FTC Requirements: Laws or Guidelines?

The FTC does not make laws. The FTC issues ‘rules’ and ‘guidance’, often called ‘policy statements’ or ‘business guidelines’. Through the FTC Act, FTC rules and guidance have the backing of existing laws, including the Fair Credit Reporting Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Children’s Online Privacy and Protection Act, the Do-Not-Call Registry Act, and the Dot Com Disclosures Act. Violations of FTC rules can result in prosecution under the laws mentioned above, including the associated civil — and in some cases criminal — penalties. FTC rules can be enforced at the federal or state level by the Department of Justice or state Attorneys General. The applicability of FTC law to Internet advertising is addressed in “Dot Com Disclosures: Information about Online Advertising”, one of many guidelines provided to the public.

The FTC uses enforcement actions to identify non-compliant individuals and entities, as a model for other advertisers or influencers to follow, and to illustrate which actions to avoid in future advertising. The FTC has traditionally been aggressive when deploying its delegated authority and has used Section 5(a) of the FTC Act, in tandem with its interpretive definition of ‘deception’, as a sword. Successful FTC enforcement actions for deceptive advertising, endorsements, and claim substantiation have been brought against a range of industries and entities including Google and Facebook.

Everyone Asks ‘Wen Disclosure’, But No One Asks ‘What Disclosure’?

The FTC requires influencers to place disclosures in such a way that someone viewing or hearing the content will not miss the information. This is meant to ensure that the average consumer can easily tell the difference between sponsored content and non-sponsored content.

Endorsement messages should make it obvious that there is a material connection with the brand. A material connection to the brand includes a personal, family, or employment relationship, equity ownership, or a financial incentive. Testimonials and endorsements must reflect the typical experiences of consumers, unless the ad clearly and conspicuously states otherwise. A statement that not all consumers will get the same results or ‘DYOR’ is not enough to qualify a claim. Testimonials and endorsements by influencers can't be used to make a claim that the advertiser itself cannot substantiate.

Will the FTC Hold Those Who Breach the Rules Accountable?

Brands and influencers should understand that FTC rules generally allow an enforcement action against the brand, the influencer, and anyone in between or associated with the improper promotion. There isn’t really a safe harbor or ‘mea culpa’ option. That said, in the face of the widespread successes of influencer marketing, the FTC has struggled to regulate influencer commercial speech and improve compliance with FTC rules. At the close of 2020, the FTC had issued only one ruling against individual influencers, supplementing its previous issuance of 90 educational letters, and 21 follow-up letters.

The FTC has generally focused its enforcement efforts on larger entities, i.e. on brands rather than individual influencers. This is likely because targeting a company is far less difficult and resource intensive than the multitude of online influencers who don’t have readily apparent addresses and can’t be easily served with a subpoena or cease and desist letter. Whatever the reason, the FTC appears reluctant to engage in the type of enforcement tactics it regularly deploys in other areas, which in turn seems to have contributed to rampant non-compliance by influencers.

With an immeasurable volume of native advertising content appearing on an ever-increasing number of platforms, the FTC does not have the bandwidth to review every instance where disclosure would be needed, or even respond to specific complaints. However, more recent and egregious activities by high-profile influencers may elicit sufficient consumer outrage to draw the FTC’s attention or spur changes in the enforcement posture. There is also the potential that certain NFT and DeFi projects that allegedly constitute securities will give rise to increased promoter liability through SEC enforcement actions, as with Bitconnect. However, until something changes, such as the FTC allowing a private right of action under Section 5 of the FTC Act, DYOR, this is NFA, and don’t expect the FTC to enforce influencer disclosure requirements.

lawpanda is a U.S. attorney with an active litigation and counseling practice. He is a member of BanklessDAO’s Legal Guild, LexDAO, the LexPunkArmy, and member/consultant/contributor to a variety of DAOs and protocols. When he’s not writing for Decentralized Law, he is working to reduce operational and governance friction between on-chain and legacy entities through corporate structuring and common-sense legal solutions. Connect on Twitter, LinkedIn, or at lawpanda.eth@gmail.com.

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