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Crowdfunding with Influencers? How do new FTC Rules Affect You?

JL Law

Crowdfunding with Influencers- How do new FTC Rules Affect You-.png

Whether you are conducting a crowdfunding to investors under Reg CF, generally soliciting accredited investors for an initial coin offering (ICO) or other capital raise using Rule 506(c), or targeting the general public with a Reg A+ offering, endorsements can be extremely valuable tools if you are trying to crowdfund a new product or a capital raise. Getting them can be a challenge - and a tempting option is to pay an endorser some kind of compensation, or offer a donation to their favorite charity.

Unfortunately, the FTC considers "paid influencers" to be less valuable or accurate to consumers than people who endorse your product simply because they like it. Because of this, the rules require that any compensation given has to be disclosed. As of September, they updated the rules to clarify what constitutes compensation. Compensation does include free travel, donations to charity in the person's name, and free products.

Also, even simply tagging a company or linking to a crowdfunding page now constitutes "endorsement" and requires that the person clearly admit to any connection with the company. So, your employees need to make a note (challenging in a short tweet) that they work for you, as do contractors who might be working on the products. And the FTC has advised that #employee or #ambassador aren't good enough without including the company name. Some social media networks have built-in disclosure tools - but these are not always good enough and shouldn't be relied on.

You are also obligated to train and check on compensated influencers - which may be as simple as warning people that if they get a free product they need to mention this when they do a review. However, if you have regular paid influencers, then you should train them. You should also talk to any freelancers or contractors that might be involved in your crowdfunding project about making sure that any mention of the project includes the fact that they're involved - in the case of artists, they are generally trying to do this anyway, but it is good practice to have at least a standard email that makes sure everyone is aware of the rules. If you are selling anything health- or safety-related then you need to keep a very close eye on what people post so they are not making false claims on your behalf. Consider making a signed agreement with paid influencers - so that if they break the rules you have legal grounds to terminate the relationship.

In April, the FTC cracked down on Instagram users in particular - mostly because of situations where connections were unclear, buried in hashtags or located below the More button where people do not always look.

A recent case is illuminating - a site called CSGO Lotto allowed people to gamble through skins on a multiplayer game (which shows how strange the internet has become). The company's owner got into trouble for posting videos and screenshots of himself winning thousands of dollars - without disclosing that he was the owner. Although this is particularly egregious, the fact that they had to pay a settlement and agree to future disclosures might remind you not to accidentally post something without making connections clear.

The basic steps to avoid getting into trouble are:

1. Disclose all financial and family relationships with a brand even if you are just mentioning them.

2. Don't rely on platform's disclosure tools, because they might not work or might not be obvious.

3. Avoid ambiguous disclosures, shorthand and jargon.

4. Don't put disclosures "below cuts" or in other locations where they might be missed. Assume that most people won't click on "More" or "Keep reading."

With crowdfunding, it is particularly important to be honest. Not only do you risk getting into trouble with the FTC, but people who are willing to put money behind a campaign tend to become angry if they think they have been duped - and then they will avoid giving money to you in the future. So, make sure everyone involved in your crowdfunding project follows the rules. Lying might give a short-term gain, but will cause problems - including legal problems - in the future.

For more information, please visit:

https://www.ftc.gov/news-events/press-releases/2017/04/ftc-staff-reminds-influencers-brands-clearly-disclose

https://www.ftc.gov/news-events/blogs/business-blog/2017/09/three-ftc-actions-interest-influencers