On Monday, the Securities and Exchange Commission announced it was imposing a $1.26 million fine on social-media influencer and businesswoman Kim Kardashian for touting a cryptocurrency without declaring how much she was paid for the ad.
Kardashian is no stranger to the spotlight, but this case puts a hard glare on emerging challenges related to “finfluencers” — and, more broadly, it’s a timely reminder that there’s scores of people who look to social media for their investing cues.
The influence of social media on investing decisions goes beyond the meme stock frenzy that first swept into markets early last year. In fact, one quarter of retail investors say the information they glean on social media is “extremely important” for where they put their money.
That’s according to recent global report from the World Economic Forum.
While financial advisers and wealth managers were the most cited sources (47%) as an extremely important source for investing decisions, 34% of retail investors polled rated what they learned from online content — including websites, blogs, podcasts and videos — as “extremely important.”
But start with Kardashian.
“Some 34% of retail investors polled said what they learned from online content was ‘extremely important.’”
— World Economic Forum online poll of 9,000 respondents
Kardashian posted about EthereumMax and its EMAX tokens on her Instagram
feed, but she did not disclose a $250,000 payment from the issuers to publish the post, SEC regulators wrote in their decision on Monday.
Kardashian’s June 2021 post did have the hashtag “#ad” at the bottom, but regulators alleged she was still unlawfully promoting the token. Kardashian, who neither admitted nor denied the allegations, paid the $1.26 million fine to settle the matter.
Kardashian was fully cooperative in the case and reached the agreement to move on “with her many different business pursuits,” her lawyer, Michael Rhodes, said in a statement. (When Kardashian made the post, she had 225 million Instagram followers; on Monday, she had 331 Instagram followers.)
Retail investors are left with another reminder they need to proceed cautiously when hearing of a money-making opportunity online. That’s true with or without a bold-faced name attached to the promotion.
Others have come under scrutiny for unlawfully touting cryptocurrencies, SEC Chairman Gary Gensler said Monday in a CNBC interview. Count people like boxer Floyd Mayweather, hip-hop impresario DJ Khaled and actor Steven Seagal in those ranks, he said.
“When celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors. We encourage investors to consider an investment’s potential risks and opportunities in light of their own financial goals,” Gensler said in a statement.
“‘We encourage investors to consider an investment’s potential risks and opportunities in light of their own financial goals.’”
— SEC Chairman Gary Gensler
But a wide swath of people are looking to social media for investment ideas at least as part of their decision-making process, data indicates.
The World Economic Forum surveyed more than 9,000 people across nine countries to gain insights into the minds of retail investors and non-investors. Participants came from countries including the United States, various European countries, Brazil, South Africa, China and Japan.
The researchers also carried out four virtual workshops, oversaw three steering committee sessions, and conducted interviews with financial services firms, regulatory bodies and academia.
In developed markets like the United States and European countries, “word of mouth and traditional media sources (such as newspapers and TV) are more influential than social media,” when it comes to making investment decisions, researchers wrote. “Younger investors (aged 18-35), however, do prioritize social media slightly,” they said of the poll, which was carried out in August.
Younger investors also tend to be more interested in cryptocurrency. While 13% of all U.S. adults owned cryptocurrency, 20% of Generation Z respondents and 24% of millennials said they owned crypto, according to separate ongoing polling from Morning Consult.
The World Economic Forum report suggests social media’s investing influence is more pronounced in emerging markets, like Brazil, South Africa and China. “More than 65% of investors in emerging markets ranked social media as extremely or moderately important in making investment decisions,” researchers said in the report, done in conjunction with Accenture
and BNY Mellon
“The influence of social media on investing decisions goes beyond the meme stock frenzy that first swept into markets early last year. ”
The Kardashian case is emblematic of a new challenge for regulators with the rise of “finfluencers,” said Joe Rotunda, vice-chair of the enforcement section committee at the North American Securities Administrators Association. The organization is comprised of state-level securities and financial regulators in the United States, Mexico and Canada.
In August, the association released an advisory to the investing public, flagging the potential pitfalls of listening too closely to notable names with big social-media presences — namely, those who do not have to follow the same disclosure requirements as financial professionals and may have undisclosed conflicts of interest.
Free-speech rights obviously allow people to go online, and speak about topics they care about, including finances and financial products, Rotunda said, the Texas State Securities Board’s enforcement director.
“But where the line tends to be crossed is when somebody is paid compensation to promote a particular product and they hold themselves out as being, perhaps, unbiased, or having some sort of inside knowledge or just lending their name to a particular product, a particular security, a particular investment,” he said. “When they are receiving compensation, a lot of the times that’s not disclosed.”
The rise of social media has also exposed young investors to self-described experts without financial expertise, he said, adding that the pandemic accelerated that trend.
Last year, member agencies brought 106 enforcement actions that were rooted in complaints from online and social media-based investment offerings, Rotunda said. That’s up 22% on last year before, and a 74% increase from 2019, he noted.
“It’s not necessarily a bad idea to get information from any source out there,” Rotunda said. Still, he added, “We would always encourage people to deal with a financial professional.”