From Sponsored Posts to Company Shares: Are Influencers Playing by the Rules?

Credit: SocialPilot

Influencers are no longer just endorsing brands—they are investing in them. With millions of followers and the power to drive massive consumer demand, influencers like Alix Earle have gone beyond sponsorships and taken financial stakes in the companies they promote. But when an influencer pushes a product they are financially invested in, are they legally required to disclose it? The lines between an honest endorsement and potential deception or securities fraud are becoming increasingly blurred, raising questions about compliance with Federal Trade Commission (FTC) regulations and the Securities and Exchange Commission’s (SEC) anti-fraud provisions. Social media influencers and emerging companies now face increasing legal challenges as regulations concerning promotional practices continue to become increasingly stricter. 

SEC and FTC Disclosure Requirements for Influencer Marketing

When promoting a brand, stock, or crypto token for payment or other financial interest, all individuals, including influencers, must comply with federal regulations. Both the Federal Trade Commission (FTC) and the Securities Exchange Commission (SEC) have disclosure rules pertaining to such situations when the person has financial ownership of the brand or security. 

Section 17(b) of the Securities Act applies to crypto tokens or securities. Section 17(b), also known as the anti-touting provision, requires that individuals who have received an interest in a security or token disclose their ownership when advertising or promoting it through interstate commerce. The SEC intended to protect the public from biased opinions attempting to positively or negatively inflate securities as part of the payment for the promotion with the addition of this provision. SEC. v. Gorsek (C.D. Ill. 2001) clarified that “in order to violate Section 17(b), a person must (1) publish or otherwise circulate (using a means of interstate commerce), (2) a notice or type of communication (which describes a security), (3) for consideration received (past, currently, or prospectively, directly or indirectly), (4) without full disclosure of the consideration received and the amount.” Notably, this requires both the existence of payment and the amount. 

Likewise, the FTC regulates the paid promotion of products or brands. In 2019, the FTC released guidance on paid affiliate marketing to comply with Section 5 of the Federal Trade Commission Act (FTC Act), which prohibits “unfair or deceptive acts,” including advertisements and marketing. In the disclosure guidelines, the FTC warns that failing to disclose payment for a brand endorsement qualifies as a deceptive ad. Compliance with the FTC Act necessitates that influencers use clear and easily identifiable disclosures that the promotion is a paid ad. Payment is not limited to monetary compensation; it may also include free or discounted products, gifts, trips, etc. Finally, the FTC clarifies that all ads must be truthful or misleading, meaning that those purporting to have used the product must actually have done so.

Recent Cases: Alix Earle and Kat Stickler

Last year, Alix Earle, a popular influencer with over seven million followers on TikTok, made the switch from being endorsed by Poppi, a Texas-based soda brand, to becoming an investor. In a TikTok video, Earle made her investment known to her followers, by stating “Beyond it being a great product, their team was just so amazing to work with. So, I decided to invest in Poppi." Her video caption included hashtags like “#proudinvestor” and “#poppipartner.” While her verbal statements and caption demonstrate some transparency, the FTC requires“clear and conspicuous,” disclosures. Her announcement has raised questions as to what her investment in Poppi means. Did she receive equity in exchange for promotional content, or did she independently purchase shares in the company? Does she have decision-making power or any insider access that could influence her ability to promote the brand? If her promotions are more than just a personal endorsement, they could be viewed as a business-driven incentive, which requires more explicit disclosures under FTC and SEC rules. 

Kat Stickler, a TikTok influencer known for her comedy and lifestyle content, is another example of an influencer transitioning from promoter to investor. In 2023, Stickler’s investment in Stur, a water enhancer brand, was announced through an official PRNewswire press release. This approach promotes transparency by providing clear, public documentation of her financial interest in the brand. However, while a press release could ensure compliance with regulations and inform industry professionals, it is not necessarily the most effective way to communicate with her core audience—her millions of social media followers. Most of her viewers are unlikely to seek corporate announcements, making it important for her to disclose her investment more explicitly in her content. While she has promoted Stur on TikTok, she could enhance transparency by consistently stating her ownership stake in her videos, including clear, in-video disclosures rather than relying solely on a formal press release. This conduct would ensure that her audience is fully aware of her financial ties to the brand, reinforcing trust and aligning with disclosure best practices.

SEC’s Approach to Influencer Investment Disclosures 

The past SEC administration demonstrated a clear commitment to enforce disclosure requirements for influencers involved in financial promotions, especially those who invest in the brands they promote. The case against Kim Kardashian reflects the SEC’s stance on the issue. Kim Kardashian was fined in 2022 for failing to disclose that she was paid $250,000 to promote EthereumMax, a crypto asset security company. The SEC’s proactive stance stemmed from the increasing concern over the potential for conflicts of interest and the risk of deceiving consumers who may view the influencer’s endorsement as unbiased. The SEC’s scrutiny ensures that influencers do not mislead their followers about the financial implications of their investments, and that they comply with established securities laws, including proper disclosures of material connections. 

Consequences for Failing to Make the Proper Disclosures

The SEC and FTC have taken enforcement actions against influencers for nondisclosure in their paid promotions. Consequences range from monetary penalties to injunctions and reputational damage. The Securities Act permits civil penalties and disgorgement for 17(b) violations. Civil penalties can range from $5,000 to $1,0000. Moreover, violators can also be required to pay the SEC the profits made from their actions, including reasonable interest. In addition to monetary requirements, violators can also be subject to cease and desist proceedings where they may be required to agree to refrain from similar conduct for a set period. Likewise, FTC violations can incur civil penalties of up to $53,088 per violation. 

In addition to the legal fallout influencers that fail to disclose may sustain, they may also suffer significant reputational damage once news outlets publicize the legal actions against them. The reputational damage stifles trust between creators and their fanbase and can also implicate long-term financial consequences through loss of followers and other potential paid partnerships.

Conclusion

With the advent of affiliate marketing continuing to dominate social media, consumers rely on federal regulators to monitor promotional content and curb deception. With the recent change in administration, new rulemaking agendas are on the horizon. President Trump’s Executive Order 14215 requires federal agencies to submit all significant regulatory actions to review from OIRA before publication. The practical effect of this order is still unknown. However, a new shift in regulatory action could be underway. For instance, the SEC’s Crypto Task Force may tighten scrutiny surrounding influencer-paid ads, given the endorsement of digital asset ownership. Alternatively, the agency’s reduced crypto enforcement actions may also indicate a stifling of pending litigations regarding paid ICO promotions. Similarly, FTC’s recent call for public comments on content moderation and deplatforming could result in stricter enforcement actions against certain brand promotions. While the new Administration has championed a differing take on its objectives, the SEC and FTC rules are still in effect. The future will illuminate this administration’s regulatory priorities and possible rule changes.

*The views expressed in this article do not represent the views of Santa Clara University.