Sunday, November 12, 2017

How Paris Hilton and celebrities made SEC, FTC, and FDA see red: possibly illegal endorsements and reviews are exploding; how to spot them and avoid them

What do actor Jamie Foxx, ex-Boxer Floyd Mayweather, rapper DJ Khaled, soccer player Luis Suarez, and hotel heiress Paris Hilton have in common?

They all endorsed an initial coin offering (ICO), either publicly or online. Jamie Foxx tweeted about anticipating Cobinhood, Floyd Mayweather and DJ Khaled endorsed Centra, Luis Suarez endorsed Stox. Paris Hilton tweeted that she supported ICO of Lydian. only to delete the tweet 3 weeks later.

New York Times wrote an expose on how boxer Floyd Mayweather and rapper DJ Khaled endorsed an ICO called Centra, despite many questions about the head of the company and the business model. And that is when Security Exchange Commission (SEC), the regulatory body of investments in the US, started to see red.

SEC had already issued an investor bulletin in July specifically on ICOs, warning that some ICOs may be considered securities in the US, and promotion of such may violate security laws because they are not registered with the SEC.

SEC in September 2017 closed two fraudulent ICOs and alleged Maksim Zaslavskiy of fraudulently promoting two ICOs, REcoin and DRCoin, which were advertised as being backed by real estate and diamonds. SEC alleged that Zaslavskiy raised only 1/10th of the money he actually did, and never hired any experts nor purchased any diamonds or real estate as it claimed it did or will do. SEC obtained a court order to freeze all assets of companies related to these two ICOs.

SEC on November 1st issued a directive to all people, but specifically, celebrities who promote/endorse ICOs.
Any celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.  A failure to disclose this information is a violation of the anti-touting provisions of the federal securities laws.  Persons making these endorsements may also be liable for potential violations of the anti-fraud provisions of the federal securities laws, for participating in an unregistered offer and sale of securities, and for acting as unregistered brokers.  
Paris Hilton seems to be the only celebrity who had walked back on his or her ICO endorsements as of 11/11/2017.

But SEC wasn't the only US Federal agency out looking for misleading and possibly illegal endorsements. Federal Trade Commission (FTC), and Federal Drug Administration (FDA) are also clamping down on such illegal behavior that may be misleading consumers.

Federal Trade Commission has kept track of rising endorsements on social media sites. In April 2017, FTC issued a "reminder" to "influencers" and brands" to clearly disclose relationships. It also has updated its endorsement guide as of September 2017 and it has a specific section on Social Media. Basically, if you are being compensated for the review or endorsement, you need to disclose it clearly or you may be in violation.

In the same month, FTC also prosecuted a pair of popular influencers in the online gaming community. Trevor “TmarTn” Martin and Thomas “Syndicate” Cassell allegedly endorsed the online gambling service CSGO Lotto without disclosing that they jointly owned the company and were its president and vice president, respectively. They also allegedly paid other influencers to post on various social media platforms about CSGO Lotto without requiring that they disclose any sponsorship. This is a double violation, as the influencers also owned the company hiring influencers.  The two settled with the SEC quickly, but they could have been fined heavily.

FTC also send various reminders and warning letters throughout the yet to other influencers who may not have clearly disclaimed their relationships with the brands. Even primarily visual social media sites like Instagram are required to overlay disclaimer text (not abbreviations) as per endorsement guide above. FTC had previously warned companies like Ann Taylor (2010) and Hewlett Packard (2012) for failure to require the bloggers who were compensated for posting content about them. In 2015, Machinima video network on Youtube also got an FTC warning when it offered its video stars money to produce videos highlighting Xbox One as a part of Microsoft advertising campaign, without requiring the stars to disclose they are being compensated to do so.

But the most often offender would be the Kardashians. Kim Kardashian had gotten into trouble with Federal Drug Administration (FDA) for not labeling Instagram posts about drugs treating morning sickness. The consumer watchdog organization Truth in Advertising (TINA) had spotted the Kardashian-Jenner family with over 100 potential violations of FTC guidelines in 2016 alone on Instagram, covering over two dozen brands.

But this is merely the tip of the iceberg. Those of you who keep up with tech reviews may recall the spectacular crash of Kanoa wireless headphones, which basically died after one scathing review, where the reviewer Crouch, who had been in contact with Kanoa all along, alleged that he was offered $500 in cash for an early and good review. Incensed, Crouch posted his epic struggle with the product, how crappy the product is, and how mad he was at being bribed. Four days after the video was posted, Kanoa went kaput.

Companies are fighting back. Amazon, for example, has banned incentivized reviews (even for receiving products, except ebooks) since October 2016, but it did not seem to slow down the flood. Recently Amazon had removed the reviewer ranking altogether. But retailers seem to have not gotten the message and some people are still being solicited to give positive reviews.  And many shill reviews are written by hired help in India getting paid practically nothing.

However, the crap goes both ways. There are now book review blog sites that offer a book author favorable reviews... for a price.

So what can you do?

Stop relying on celebrity endorsements for ANYTHING

What does a celebrity have to do with anything? If s/he is neither a professional nor an expert regarding such, why do you listen at all?

Why do you look for endorsements on social media at all? 

Shouldn't you be looking at review sites and ask opinions of real professionals and experts?

Use fake review checker if possible

For Amazon, there are FakeSpot and ReviewMeta to check if the product has shill reviews.

You should NOT trust any endorsement or reviews unless you are sure all relevant factors have been disclosed.

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