In April 2017, swathes of eager concertgoers converged on the tiny island of Great Exuma to attend the inaugural Fyre Festival—promoted as the premier music festival of the season. Lured by celebrity Instagram posts and endorsements, those with tickets anticipated performances by top artists, private villas, gourmet meals and a once-in-a-lifetime experience.

However, what was advertised as an ultra-luxe event turned out to be anything but. “Luxury” meals were sliced-cheese sandwiches. Private villas were tents with rain-soaked carpeting. Promised artists never appeared. To the hundreds of attendees, expectations touted on social media paled in comparison to reality.

Despite the festival's utter failure, the internet-based guerilla marketing campaign that led up to the event was a monumental success. Through a coordinated campaign, social media “influencers”—i.e., individuals who leverage their social media presence to encourage followers to buy specified goods and services—promoted the event on Instagram by simultaneously posting identical photos and hashtags. These influencers also uploaded glamorous beach pictures from a promotional photo shoot sponsored by the festival's organizers. The buzz was so great that tickets—which could cost upwards of $100,000—promptly sold out.

After the festival imploded, social media influencers received significant backlash for their role in promoting it—including making alleged misrepresentations. These influencers were also criticized for their lack of sponsorship disclosures. Indeed, many influencers received substantial sums (like an alleged $250,000 paid to model Kendall Jenner) for their endorsements—a fact not disclosed in their respective Instagram posts.

Certain influencers were also sued in a class action lawsuit by Fyre Festival attendees.

Influencers have also come under increased scrutiny by federal agencies, with the Federal Trade Commission (FTC) settling its first-ever complaint against influencers in 2017. This reaction has far-reaching implications for what is considered deceptive or misleading marketing and could expose companies utilizing such marketing tactics to federal lawsuits.

The FTC Exerts Its Influence on Influencers

The FTC's endorsement guides reflect a truth-in-advertising principle: Endorsements must not be deceptive or misleading. As such, the FTC requires influencers to clearly and conspicuously disclose “material connections” on social media between the endorser and the product marketer, unless the connection is already clear from the context of the communication. Such connections could consist of a business or family relationship, monetary payment or the provision of free products to the endorser.

Notably, marketers have a reciprocal obligation to advise influencers of their disclosure obligations—and to ensure influencers are complying with the guidelines. In April 2017, for instance, the FTC announced it had sent letters to marketers of brands endorsed by influencers reminding them of these responsibilities. The FTC also notified more than 90 celebrities, athletes and influencers regarding their FTC disclosure requirement.

While the FTC did not initially threaten or require any action, the agency sent follow-up letters to influencers in September 2017. This follow-up correspondence cited specific social media posts that did not comply with its guidelines and sought written responses. Specifically, the FTC told influencers they should disclose material connections and asked them to advise whether they have such connections with the brands endorsed in the identified posts. If so, the influencers had to inform the FTC of what actions they would take to ensure the posts clearly and conspicuously disclosed those relationships.

That same month, the FTC also settled its first-ever complaint against individual social media influencers. Trevor Martin and Thomas Cassell, two individuals widely followed in the online gaming community, had allegedly promoted the gambling website CSGO Lotto without disclosing they were company owners and officers. According to the complaint, Martin and Cassell also had an influencer program by which they paid other gaming influencers thousands of dollars to promote CSGO Lotto online. While the contracts prohibited influencers from making negative statements about the company, they did not require the influencers to affirmatively disclose the payments on their social media posts.

The final consent order settling the FTC's charges was issued in November 2017. Not only did it prohibit Martin, Cassell and CSGO Lotto from misrepresenting that any endorser is an independent user or ordinary consumer, it also required clear and conspicuous disclosures of any material connections with endorsers.

More recently, the FTC approved final consent orders settling endorsement and deceptive advertising charges against Creaxion Corp. and Inside Publications. According to the complaint, Creaxion partnered with Inside Publications to obtain athlete endorsements of its mosquito repellant on social media without disclosing that the athletes were paid. The two orders prohibited Creaxion and Inside Publications from making further misrepresentations and requiring them to disclose material connections with their endorsers.

The SEC and CFTC Weigh In

The FTC is not the only agency scrutinizing influencer endorsements on social media. On Nov. 29, 2018, the Securities and Exchange Commission (SEC) announced it had settled charges against famed music producer DJ Khaled and boxer Floyd Mayweather Jr.—both of whom had failed to disclose payments they received for promoting investments in Initial Coin Offerings (ICO)—a type of crowdfunding using cryptocurrency.

Both men's social media promotions came after the SEC had issued its DAO Report in 2017, concluding that cryptocurrency coins sold in ICOs could qualify as securities, and were subject to regulation under federal securities laws. The SEC determined Khaled and Mayweather had violated Section 17(b), 15 U.S.C. Section 77q, of the Securities Act, which makes it unlawful to promote the sale of any securities without fully disclosing the receipt of “such consideration and the amount thereof.” In other words, by touting ICOs on their social media accounts without disclosing the reciprocal receipt of compensation, Khaled and Mayweather had allegedly violated securities laws.

According to SEC Enforcement Division Co-Director Stephanie Avakian, without the disclosures, “Mayweather and Khaled's ICO promotions may have appeared to be unbiased, rather than paid endorsements.” The SEC warned investors to be skeptical of investment advice posted to social media platforms because influencers were often paid promoters.

Ultimately, Khaled agreed to pay $50,000 in disgorgement, along with penalties and interest. Mayweather agreed to pay $300,000 in disgorgement with penalties and interest. Both men also agreed not to promote any securities for two and three years, respectively.

Like the SEC, the Commodity Futures Trading Commission (CFTC) also prohibits individuals promoting trading advice from not disclosing that the promoter has received compensation, see 17 C.F.R. Section  4.41(a)(3)(iii). And the CFTC has asserted jurisdiction over certain cryptocurrency transactions. Thus, individuals who receive compensation to tout trading platforms or futures-based investments have a similar disclosure obligation.

Implications: The Cost of Influence?

The rise of the social media influencer has changed the way marketers target consumers. According to a 2016 Forbes article, “Influencers Are The New Brands,” market research has shown that 92% of consumers trust an influencer more than an advertisement or traditional celebrity endorsement. Another April 2019 survey from Wego Health found that patient influencers will likely turn to Facebook, Instagram and Twitter as their first source for health information—before going to pharma websites. As the use of social media influencers increases, so too will the attendant regulatory and private attention.

High-profile enforcement actions similarly evidence an increased government interest in social media activities. Accordingly, it is important for companies, marketers and influencers to understand the legal landscape regarding social media advertising. Notably, the FTC has made it clear that disclosure obligations are bilateral, and that marketers must ensure their influencers are complying with the agency's guidelines.

As new technologies and investment opportunities arise (e.g., ICOs, cryptocurrency, etc.), it is equally important for influencers and marketers to understand the implications beyond truth-in-advertising. Serious (yet possibly unintended) violations of the securities law could result. In fact, the cited provisions of the Securities Act and Commodity Exchange Act regulations can be prosecuted criminally, and the failure to adhere to the FTC's guidelines also pose the real threat of other criminal charges like wire fraud.

Consumers are also increasingly demanding transparency and authenticity in their advertising. This means when a company's chosen influencer is targeted for noncompliance, it can impact the brand's reputation as well. In an extreme situation, it can also open the company up to class action litigation by disgruntled consumers.

As social media platforms are increasingly utilized for guerrilla marketing, both influencers and marketers must ensure compliance with disclosure requirements to avoid criminal and civil liability. Otherwise, companies may be getting more than they bargained for when trying to capitalize on the advertising power of online influencers.

Jeffrey N. Rosenthal is a partner in Blank Rome's Philadelphia office. He concentrates his complex corporate litigation practice on consumer and privacy class action defense and regularly publishes and presents on class action trends, attorney ethics and social media law. Contact him at [email protected].

Jed M. Silversmith is Of Counsel in the firm's Philadelphia office. He focuses his practice on in white-collar matters and regularly represents defendants in federal court in civil and criminal matters. Silversmith previously worked at the Justice Department and the CFTC's Division of Enforcement. Contact him at [email protected]

Caroline S. Choi is an associate with the firm. She concentrates her practice on complex commercial litigation matters and white-collar investigations. Prior to joining Blank Rome, Choi was a law clerk at the U.S. District Court for the Eastern District of Pennsylvania. Contact her at [email protected].