You know how about 95 percent of what you see on Instagram these days seems to be celebrities and assorted influencers touting a wonder-product or life-improving service?
Simple, right? It's safe to assume they're getting paid or hooked up with free swag.
Well, as it turns out, we can assume whatever we want. But there are certain products and services that are governed by far stricter rules than your average collagen powder or fitness class.
That wakeup call came Oct. 3 when the Securities and Exchange Commission announced that Kim Kardashian would be paying $1.26 million in penalties, disgorgement and interest to settle charges that she promoted EMAX Tokens, a crypto asset security from EthereumMax, on social media without disclosing that she was being paid $250,000 to do so.
"Ms. Kardashian is pleased to have resolved this matter with the SEC," her lawyer told E! News. "Kardashian fully cooperated with the SEC from the very beginning and she remains willing to do whatever she can to assist the SEC in this matter. She wanted to get this matter behind her to avoid a protracted dispute. The agreement she reached with the SEC allows her to do that so that she can move forward with her many different business pursuits."
As part of her penance, Kim has also agreed not to promote any crypto asset securities for three years.
"The SEC wants to make certain that when celebrities pitch an investment, investors know whether they are being paid or not," Andrew Stoltmann, adjunct professor of securities law at Northwestern University, exclusively told E! News. "That's important because that goes to the motivation of the person making the recommendation, since we tend to look differently at paid recommendations."
Kim could have included a disclosure on her Instagram post to relay that she was being compensated, Stoltmann said, which she had an obligation to do.
As for the seven-figure fine, "I don't think it was excessive," he observed. "I think she had to pay back the $250,000 that she was paid to hype this crypto investment. And then there were penalties, disgorgement [giving up illegally obtained profits], and interest on top. I think the SEC wanted to deter other celebrities from doing something similar, and that's why they imposed the fine."
Moreover, Stoltmann said, "I think Kim Kardashian did do the right thing by settling this quickly instead of fighting it and sucking up resources from the SEC."
He also clarified that, though she was found to be in violation of federal securities law, this was not a criminal proceeding.
Nor does Stoltmann think that this will put an end to Kim's own legal aspirations, the Skims founder having passed California's baby bar last year on her fourth try. But it admittedly is not a great look for a would-be future attorney.
"There is a character and fitness evaluation that everybody who wants to become a lawyer has to go through and they look for things like arrests, they look at things like being sued," he explained. "And this is a pretty significant issue for her. So, is it a potential speed bump to becoming a lawyer? Yes. Do I think it will preclude her from becoming a lawyer? No."
If or when Kim ends up taking the bar exam, "she will have to disclose it at the time she officially tries to become a lawyer," Stoltmann continued. "This could potentially prevent her from getting licensed as a lawyer. I don't think it will, but it could." Suffice it to say, he said, "it's not going to be a comfortable discussion" with the state bar association.
While crypto currency's original selling point for some was that it isn't beholden to the same government regulations as investments involving the U.S. dollar and other traditional kinds of money, regulators are playing catch-up as the crypto industry has expanded. As Gurbir S. Grewal, the director of the SEC's Division of Enforcement, said regarding Kim's case, "Investors are entitled to know whether the publicity of a security is unbiased, and Ms. Kardashian failed to disclose this information."
Without naming names, Stoltmann also predicted that this may be only the beginning when it comes to the SEC making sure that celebrities who are getting increasingly enthusiastic in public about crypto are abiding by the rules.
"We're seeing more and more celebrities who are making recommendations for crypto-related investments," Stoltmann explained. "And I think this is probably the first of multiple celebrities who are going to be targeted by the SEC in the next six to 12 months."
Meanwhile, there's a difference between a celebrity giving a thumbs-up to a specific crypto investment on Instagram and appearing in a commercial hyping the future of crypto and NFTs, as there's a tacit understanding that the star is being compensated for the effort.
"I think the important thing would be to remember that when it's a commercial, it's obvious that's a paid spokesperson," Stoltmann said. "That's the difference. You know you're watching an ad [on TV], but it's not clear on Instagram."
And Instagram is the Kardashian family's milieu, with Insta post planning-and-scheduling service Hopper HQ reporting this year that Kim, who as of this moment has 331 million followers, could make as much as $1.7 million from a single sponsored post. (Surpassed among her siblings only by Kylie Jenner's $1.8 million.) Plus there's the unparalleled exposure she's able to give to her own companies, including Skims and KKW Beauty.
The $1.26 million hit aside, Kim's run-in with the SEC likely won't affect her overall existence as a branding powerhouse.
"I think this enforcement action and the fine will stay in its own vacuum," Stoltmann said. "It's not a good look for her but I think it's something that will rapidly dissipate and won't impact any of her other businesses."