The Newsroom

A: They’ve been accused of either committing or aiding and abetting rug pull scams.

In a prior post, my colleague Chih-Hsun (Tim) Lin discussed rug pulls in the context of NFTs. Similarly, in the context of cryptocurrency, rug pulls are scams in which a creator or team of creators of inflates the value of their token before disappearing with the funds, leaving their investors with tokens that are worthless.

You may have seen earlier this month that the Securities and Exchange Commission (SEC) announced charges against Kim Kardashian, the reality TV star and influencer, for her Instagram post promoting EthereumMax (EMAX). While Kim K’s post included the hashtag #AD, which is part of an initiative by the social media platform to make users aware what posts are sponsored content, she failed to disclose that she received $250,000 to publish the post, and according to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, the hashtag was insufficient to satisfy federal securities laws that require “any celebrity or other individual who promotes a crypto asset security [to] disclose the nature, source, and amount of compensation they received in exchange for the promotion.” To settle the case, Kim K. agreed to pay the SEC $1.26 million and agreed to refrain from promoting any cryptoasset securities for three years.

This agreement to refrain from promoting cryptoasset securities has been used before by the SEC in its case against Floyd Mayweather Jr., a professional boxer, and Khaled Khaled, a music producer more famously known as DJ Khaled. In November 2018, the SEC announced charges against the two for failing to disclose payments they received for promoting investments in Initial Coin Offerings. To settle the case, Mayweather agreed to pay $614,775 and agreed to refrain from promoting any securities for three years. Similarly, Khaled agreed to pay $152,725 and agreed to refrain from promoting any securities for two years. Floyd Mayweather allegedly violated his ban in June 2021 when he attended a Bitcoin conference in Miami wearing an EMAX t-shirt, the same cryptocurrency that paid Kim K. to promote its project.

In January 2022, a federal class action was filed in the Central District of California by an EMAX investor, Ryan Huegerich on behalf of other investors, against the executives of EthereumMax, as well as Kim Kardashian, Floyd Mayweather Jr. and others, for essentially increasing the market value of EMAX tokens through promotions by celebrities and influencers (aka “pump”) and selling their tokens for a profit (aka “dump”). The 26-page complaint could be read here . The “pump and dump” alleged in the complaint is another way of describing a rug pull scam. Kim K and Floyd Mayweather are both seeking to dismiss the complaint against them.

Had these investors read my colleague Tim’s article on rug pulling, they would have known to conduct due diligence and would not have relied only on the promotions of celebrities and influencers. For example, the complaint even alleges that EMAX tokens were launched without “whitepaper.” Whitepapers are “documents released by the founders of the project that gives investors technical information about its concept, and a roadmap for how it plans to grow and succeed.” This raises the question, ‘So, on what did Ryan Heugerich base his decision to invest in EMAX tokens?’ I guess we will see what happens as Heugerich’s case progresses.

The Hollywood elite are not the only entities against which rug pull scams have been alleged. Major media outlet CNN has also been accused of orchestrating a rug pull. In June 2021, CNN launched a six-week experiment called Vault, an NFT marketplace that partnered with Dapper Labs to highlight moments in history. Vault released NFTs, advertised its utility and a 2022 Roadmap that contemplated its journey into 2023, and promised a multitude of perks for Vault NFT holders, including exclusive events, exclusive CNN perks, and the ability to mint your own CNN article NFT. However, those promises remain unfulfilled as, on October 10, 2022, CNN announced the end of Vault.

Interestingly, unlike EMAX, CNN has represented that Vault plans to compensate its NFT holders by paying them approximately 20% of the original mint price for each NFT owned in the form of either FLOW tokens or stablecoins. Is that partial rebate enough to appease the collectors from foregoing the remaining 80% of their investments and the Vault’s unfulfilled promises? Presumably, CNN Vault and its lawyers are hoping so, but how do they overcome the fact that at the end of the day, the collectors invested funds for promises of future perks that never materialized.

Is it enough that their NFT holders walk away not completely emptyhanded? When does a failed investment become a rug pull scam? We’d love to hear your thoughts. You can connect with us on Twitter and LinkedIn. Stay tuned to Ingram’s NFT Newsroom for the latest developments regarding NFTs.

By: Rachel J. Hong