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Crypto Law/Level V · Builders and launchers/5.3 Promotion and liability/Lesson 3

KOL rounds and undisclosed allocations

When influencers get cheap or free tokens to promote a launch, the hidden allocation can turn an opinion into a misleading statement under several bodies of law.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Skip KOL rounds and launch with no promoter allocations. That avoids section 17(b), FTC and MiCA disclosure duties altogether and costs nothing.
  2. If promoters get tokens, they must disclose the allocation, the price paid and its value with every post, whether or not the tokens are locked; under section 17(b) tokens ‘to be received’ count as payment.
  3. Lock promoter tokens on-chain for a period you publish, and never sell soon after recommending. Capital Gains (1963) and Zweig (1979) treat undisclosed selling into one’s own recommendation as fraud.
  4. For tokens that are commodities, CFTC Rule 180.1 still bars misleading omissions. In the EU, MiCA Article 91(3)(c) treats undisclosed positions held when giving opinions as market manipulation.
  5. Projects: list every pre-launch allocation in the published distribution, which buyers can check on-chain. The SEC charged Justin Sun for orchestrating undisclosed celebrity promotion, not only the celebrities.

MaterialsZweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979), on a columnist who praised shares he had bought at a discountCFTC Rule 180.1 (17 CFR 180.1), the anti-fraud rule for commoditiesMiCA Article 91(3)(c) (Regulation (EU) 2023/1114) and the FCA’s guidance FG24/1 on financial promotions on social mediaA block explorer view of the wallets that received a token before its public launch

Wonder

  1. Is receiving free or discounted tokens for promotion any different, legally, from being paid in cash?
  2. Is it unlawful for a promoter to sell tokens after recommending them?
  3. Who is responsible when the allocation is hidden: the promoter, the project, or both?

Explore

  1. A ‘KOL’, short for key opinion leader, is an influencer with a large following. In a ‘KOL round’ a project gives such people tokens before launch, free or at a discount, often with a short lock-up, in return for promotion. An ‘undisclosed allocation’ is any such block of supply that buyers are not told about. The legal risk comes from the gap between appearance and reality: the audience hears an independent opinion, while the speaker holds cheap supply and may sell into the demand the post creates. Team allocations are covered in lesson 5.1.2 and hidden supply in lesson 6.2.4.
  2. Tokens are payment. Section 17(b) of the US Securities Act covers consideration ‘received or to be received, directly or indirectly’, and requires its amount to be disclosed when a security is promoted (lesson 5.3.1). The SEC’s case against Steven Seagal in February 2020 counted a promise of $750,000 worth of the issuer’s tokens alongside $250,000 in cash. So for a token that is a security, a KOL allocation is consideration that has to be disclosed with its value, whether or not it is locked, vested or still to be delivered.
  3. Selling after recommending adds a second problem, called ‘scalping’. In SEC v. Capital Gains Research Bureau (1963) the Supreme Court held that an investment adviser who bought shares, recommended them, and sold into the price rise committed fraud by not ‘fully and fairly revealing his personal interests’. In Zweig v. Hearst Corp. (1979) the Ninth Circuit held that a financial columnist who praised a company without disclosing that he owned shares bought at a discount and intended to sell them for a quick profit could be liable under SEC Rule 10b-5. The facts are close to a modern KOL round.
  4. If the token is not a security, other rules remain. The CFTC’s Rule 180.1 makes it unlawful, intentionally or recklessly, to make misleading statements or omit material facts in connection with a contract of sale of any commodity in interstate commerce, and the CFTC treats many crypto assets as commodities (lesson 1.2.4). The FTC’s Endorsement Guides list free or discounted products as material connections that must be disclosed clearly when the audience would not expect them (16 CFR 255.5). A promoter’s undisclosed holding can therefore matter under federal commodities and consumer law even outside securities law.
  5. The EU and UK address the same conduct directly. MiCA Article 91(3)(c) treats as market manipulation voicing an opinion about a crypto-asset through traditional or electronic media after taking a position in it, and profiting from the price effect, without disclosing that conflict ‘in a proper and effective way’. In the UK, the FCA’s guidance FG24/1, published on 26 March 2024, warns that influencers who promote a regulated product without approval from an authorised firm may be committing a criminal offence; cryptoassets have been inside that promotion regime since 8 October 2023.
  6. Projects carry risk as well as promoters. In March 2023 the SEC charged Justin Sun with orchestrating undisclosed celebrity promotion of the TRX and BTT tokens, not only the celebrities themselves (lesson 5.3.1). A launch page that describes supply as fairly distributed while blocks have gone to promoters may be a misleading statement by the issuer (lesson 5.1.7). A practical check: compare the published token distribution with the wallets that received tokens before launch on a block explorer, and note any large early transfers that the published figures do not explain.

Key facts

  • Section 17(b) of the Securities Act covers consideration ‘received or to be received, directly or indirectly’, which includes payment in tokens.
  • The SEC’s 2020 case against Steven Seagal involved a promise of $750,000 worth of the issuer’s tokens in addition to $250,000 in cash.
  • In SEC v. Capital Gains Research Bureau (1963) the Supreme Court held that an adviser trading on his own undisclosed recommendations committed fraud.
  • In Zweig v. Hearst Corp. (9th Cir. 1979) a columnist who praised discounted shares he planned to sell, without disclosing it, was held potentially liable under Rule 10b-5.
  • MiCA Article 91(3)(c) treats undisclosed opinion-based profiting from a prior position in a crypto-asset as market manipulation.
  • The FCA’s finalised guidance FG24/1 on financial promotions on social media was published on 26 March 2024.

Exercise nine, six, three, one

9CollectList up to 9 launches you know of where influencers promoted a token, noting anything known about their allocations, price paid and lock-ups (some lists are shorter).
6ClusterSort them into 6 groups: allocation and price disclosed, allocation disclosed without price, lock-up disclosed, allocation discovered later on-chain, no allocation found, and unknown.
3DistillReduce the 6 groups to 3: promotions with adequate disclosure, promotions that hid a material connection, and cases you cannot judge without more facts.
1CrystallizeWrite 1 sentence explaining why a free token allocation can make an influencer’s opinion misleading even if every word of the post is true.

Fact check

Dates, figures and claims checked against the published sources listed below.

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