It was all the Buzz last year.

A cryptocurrency company called Centra Tech raised over $32 million in an ICO which was largely attributed to their backing by celebrities. The celebrities in question were boxer, Floyd Mayweather, and music producer DJ Khaled.

However, last week the SEC released fraud charges against the ICO and have arrested two of the co-founders. Among the charge sheet that was presented, they mentioned that this ICO had attracted a great deal of attention due to unnamed “celebrity endorsements”.

Now, many are wondering whether the promoters themselves could be in legal hot water. To quote DJ Khaled, have they “played themselves”?

Let’s take a deeper look.

Backstory on Centra Tech

Centra Tech Cards
Image via centra.tech

Cetra Tech Inc. was as company that was co-founded by Sohrab “Sam” Sharma and Robert Farkas. The company completed an ICO last year on the back of supposed partnerships between Centra and Visa / Mastercard for debit cards.

The company sold the investors CTR tokens and claimed that they would be able to easily spend these tokens with the debit cards they would soon be launching. The only problem with these partnerships was that they did not exist.

There were no discussions between Mastercard nor Visa with any of the founders at Centra. There were a number of other red flags such as fake team members on their homepage etc. but these were largely swept under the rug.

The SEC did not take kindly to this and last week decided to halt the fraudulent scheme that sold unregistered securities. Moreover, authorities arrested the founders and unsealed a lengthy rap sheet that accused them of wire fraud and conspiracy to commit wire fraud.

Those Celebrity “Endorsements”

Celebrity endorsements in cryptocurrencies were not restricted to Centra Tech. We have had examples from Jamie Foxx, Paris hilton and Louis Suarez. Mayweather himself has promoted numerous other cryptocurrency projects including Stox.

What incentive there was to promote these projects is not known. Some say that they were paid promotions and others claim that they received their share of some of the pre-sale tokens. In the case of Centra Tech, it is not immediately clear what sort of financial incentive was given to Mayweather and Khaled.

Below is the tweet that Floyd Mayweather sent out about Centra last year in September.

Floyd Mayweather Centra Tweet
Image Source: Twitter

The SEC had warned many of these promoters that they should disclose whether they had gotten any compensation to promote any sort of ICO. These disclaimers were nowhere to be found in these promotions.

Hence, this raises some important questions around the legal jeopardy that these celebrities could be in. Although they may not have known that is was fraudulent, they could have been “unwitting participants”.

Legal Questions Raised

Although the SEC statement did not name Mayweather or Khaled in the announcement, they didn’t close the door on that possibility. The mere fact that the SEC mentioned these endorsements is enough of reason to worry. They could have been “aiding and abetting a fraud”.

Nick Morgan, who is a former SEC attorney told the Financial times that the statement “sent a clear signal”. He went on to say “There was nothing in there that I think anyone should take comfort from, just because they were not individually named”

Another legal expert from Cornell Law School had similar words of caution. Charles Whitehead said that even if an ICO did not turn out to be scam, the promoters are opening themselves to legal action because they promoted an unregistered security. He said:

This is why, at a Goldman Sachs offering, you don’t see Kanye [West]

Even if the promoters are not at risk from government prosecution, the case could open a legal can of worms in class action lawsuits. These are already being pursued vigorously by hundreds of investors for a range of different cryptocurrency projects.

David Silver of the Silver Miller law group has already instituted a number of class action lawsuits against ICOs and cryptocurrency projects. For example, he has recently filed a case against the developers of the Nano XRB cryptocurrency for the Bitgrail hack saga that occurred in February.

Now it seems as if he may have those who promoted the cryptocurrency in his sights. He told the Financial times that:

In the next ninety days we are going to see lots of litigation surrounding the promoters of these ICOs

Make with that statement as you may, but class action lawsuits are lucrative targets for lawyers especially when the defendant is a large company or wealthy individual. Lawyers know that large settlements in these cases are worth the effort of taking on powerful opponents.

Lessons for The Rest of Us

When these celebrities started promoting these ICOs last year, there were many in the community who were sceptical. While no doubt talented in their own fields, they questioned the knowledge celebrities such as Paris Hilton or Floyd Mayweather had when it came to cryptocurrencies.

Hence, those who decided to invest in Centra Tech broke the number one rule in ICO due diligence: Do Your Own Research (DYOR). Even if the promoter was someone with knowledge in the field you should still dig deeper personally.

What does this mean for ICOs going forward?

This will most certainly mean that celebrity endorsements of ICOs will be few and far between. The SEC has already halted a number of ICOs that they deemed to be breaking securities laws.

Will Floyd and DJ Khaled be dragged into the mess? Only time will tell but there are many Centra investors who may be eyeing the courts.

Featured Image via Fotolia & SEC.gov

Posted by Editorial Team

Editors at large. Posting the latest news, reviews and analysis to hit the blockchain.