Memecoins
Why Meme Coins Could Create a Legal Minefield for Celebrities
With over 500,000 tokens launched in May alone, the volume of meme coin offerings has increased significantly. Thanks in part to sites like Pompe.fun, anyone can now easily spin a token symbol, upload an image, and flip a meme coin. And thanks to social media and trading bots, it’s also easier than ever for meme coins to go viral and make huge profits.
Given all of this, it’s not at all surprising that we’re now seeing a new wave of celebrities jumping into the crypto space with their own tokens. And this massive influx of new celebrity coins also comes with a myriad of legal risks.
Last week, the crypto space was abuzz with heated debate over whether Donald Trump’s son Barron was behind the project. DJT meme piece on Solana. The creator of this token – the infamous “Pharma Bro” Martin Shkreli – claimed in a Twitter Spaces marathon that this meme coin was the official token of Donald Trump. But there is still no official confirmation on this.
Crypto celebrities are nothing new. Over the last cycle, we’ve seen dozens of A-list celebrities accept lucrative sponsorship offers from crypto projects and platforms. Due to the collapse of FTX and other platforms, many celebrities have faced a difficult situation. tsunami of trials accusing them of using their influence to mislead consumers about the dangers of crypto.
This cycle, a new meta-celebrity coin has emerged, with lower-tier celebrities using coins to grow their following, make massive gains, and find some relevance the following years, far from the spotlight.
And celebrity coins aren’t just released by “B-list” celebrities like Catilyn Jenner And Iggy Azalea– we’re even now seeing Z-list celebrities dropping coins.
During peak market cycles, fraudsters and even well-meaning celebrities can get up on their skis and drop chips with promises they have no realistic chance of ever keeping. As a result, crypto newbies and even overzealous crypto-natives can fall prey and suffer huge losses due to fraudulent token drops.
Crypto tokens offer an incredible vehicle for uniting large communities around viral memes, and potentially giving their holders a chance to generate life-changing wealth in the process. So it’s no surprise that celebrities have turned to meme coins to increase their reach and their wallets too.
But for all that, meme coins have the potential to “symbolize attention,” as one crypto influencer recently observed. Mando– meme coins can also be misused to manipulate markets and commit fraud.
We are about to enter what investors affectionately call Raoul Pal as the “banana zone” of this crypto cycle – that point where anything and everything has the potential to go parabolic. As we learned during the late 2021/early 2022 NFT market cycle, this is also the stage where scammers and opportunistic celebrities rush into the crypto community to pump and dump tokens in order to make massive gains . Unfortunately, there is a strong incentive for fraudsters to exploit this stage of the market cycle and prey on consumers for quick and easy profits.
At the height of the Banana Zone, founders may become blind to the legal risks of falling meme coins. In their quest for ever greater profits, founders forget or intentionally ignore the fact that they can be sued and even criminally prosecuted for the outrageous promises they make in connection with coin offerings.
As we move deeper and deeper into the banana zone, it’s a good time to remind influencers and celebrities of the legal pitfalls that can come with launching and promoting meme coins. An important point to make is that regardless of whether a celebrity coin project is considered a commodity or a security, its founders nonetheless expose themselves to potential civil or criminal liability if they make fraudulent statements about the token to increase sales.
Celebrities who promote or launch meme coins can face significant civil liability if their actions are perceived to have manipulated markets. Celebrities who promote or create meme pieces may also face charges of fraud and making false statements if it can be proven in court that they made false or misleading statements.
In order to succeed in a civil fraud action, consumers generally must prove that a celebrity misrepresented a material fact about their token – knowing that the statement was false or intended to deceive – and that the The consumer relied on this statement to his detriment.
Celebrities promoting meme coins can even be held liable under securities laws, which impose strict regulations to protect investors from fraud and market manipulation. Whether a meme is considered a security or commodity depends on several factors beyond the scope of this article. But regardless of whether a meme coin is a security subject to SEC regulation or a commodity under the CFTC’s jurisdiction, fraudulently marketing meme coins can expose its founders to significant regulatory, civil and civil penalties. and even criminal.
When evaluating whether a token is a fraudulent pump and dump scheme, regulators and prosecutors will generally consider the following factors: (1) the specific characteristics of the token, including the intent behind the coin’s launch even ; (2) how the token is marketed, including potential promises of huge returns; and (3) the team’s representations about the future usefulness of the token.
Clearly, the more the promises of massive gains and future utility are exaggerated and under-delivered, the more likely these tokens are to be subject to regulatory and law enforcement scrutiny.
Although meme coins still offer new and uncharted waters for regulators, prosecutors are coldly and methodically evaluating these token offerings under existing criminal fraud laws. If a celebrity coin looks and sounds like a “pump-and-dump,” then there’s a good chance a prosecutor can prove the essential elements of a scheme to defraud consumers.
To successfully prosecute a celebrity in a coin-pumping and dumping scheme, the government must prove: (1) the celebrity hatched a plan to defraud investors; (2) the celebrity acted with the specific intent to defraud investors out of money or property; (3) the celebrity used interstate cables, such as telephone lines and Internet connections, to carry out the scheme; and (4) the celebrity scheme to defraud the relevant interstate or foreign commerce.
It can be quite easy for prosecutors to prove these elements, if for example, a celebrity makes false statements about the token’s track record or anticipated earnings in an attempt to generate hype and attract buyers. Market manipulation through coordinated efforts to drive up the price or create the illusion of high demand for the token may also be evidence of a fraud scheme.
If celebrities or founders sell their tokens after the price has been artificially inflated, thereby causing the price to fall rapidly, and such market manipulation results in significant losses for other holders, then this may be further evidence of a fraud scheme.
It should also be noted that willful ignorance or willful blindness of founders regarding the illegality of their conduct is generally not a viable defense to fraud prosecution.
While meme tokens can attract attention, connect communities, and create opportunities for significant financial gain, they also open the door to widespread fraud and manipulation. The ease of launching meme coins, combined with the viral nature of social media, makes it crucial for consumers to be vigilant and educate celebrities from the ground up about the legal ramifications of their actions.
Disclaimer: The information provided in this opinion article is for informational purposes only and should not be considered legal or financial advice. Readers should consult their own legal and financial advisors to understand the specific implications and regulations applicable to their situation. The opinions expressed in this article are those of the author and do not necessarily reflect the opinions of affiliated organizations, celebrities, meme tokens, or brands.
Edited by Andrew Hayward