Legal Risks for Celebrities

Meme coins created or promoted by celebrities can bring big profits and attention but also serious legal issues. In May alone, over 500,000 tokens were launched, showing a huge increase in meme coin offerings. With sites like Pump.fun, anyone can easily create and launch a meme coin. Social media and trading bots make it easier than ever for these coins to go viral and generate large profits.

Given this, it’s no surprise that more celebrities are entering the crypto space with their own tokens. However, the surge of celebrity meme coins also brings many legal risks. Recently, there was speculation about whether Donald Trump’s son Barron is behind the DJT meme coin on Solana. Martin Shkreli, known as “Pharma Bro,” claimed this token is the official Donald Trump coin, but there’s no official confirmation yet.

Celebrities entering the crypto world aren’t new. In the last cycle, many top celebrities endorsed crypto projects. After the collapse of platforms like FTX, many faced lawsuits for misleading consumers about crypto risks. In this cycle, lower-tier celebrities are using meme coins to grow their audience and make quick gains.

It's not just B-list celebrities like Caitlyn Jenner and Iggy Azalea launching meme coins; even lesser-known celebrities are getting involved. During peak market cycles, both scammers and well-meaning celebrities can make promises they can't keep, causing new and experienced investors to lose money.

Meme coins can unite communities around viral memes and potentially generate significant wealth. Celebrities use them to grow their reach and wallets. However, these coins can also be used to manipulate markets and commit fraud.

Investor Raoul Pal calls this market phase the “Banana Zone,” where anything can go parabolic. As seen in the 2021-2022 NFT boom, this stage attracts scammers and opportunistic celebrities who pump and dump tokens for big gains. Scammers have a high incentive to exploit this market stage.

In the Banana Zone, founders may overlook the legal risks of launching meme coins. In their quest for profits, they might ignore that they can be sued or even criminally prosecuted for making false promises.

As we move deeper into the Banana Zone, it’s crucial to remind influencers and celebrities of the legal dangers of launching and promoting meme coins. Whether a meme coin is a commodity or security, founders can face civil or criminal charges if they make false claims to boost sales.

Celebrities promoting or launching meme coins can be held legally responsible if their actions manipulate markets. They can face charges of fraud and misrepresentation if they make false claims. To succeed in a fraud claim, consumers must prove that a celebrity made a false statement about their token, knew it was false, intended to deceive, and that the consumer relied on this statement to their harm.

Celebrities could also be liable under securities laws, which protect investors from fraud and market manipulation. Whether a meme coin is classified as a security or commodity depends on several factors. Regardless, fraudulent marketing can lead to significant legal penalties.

Regulators and prosecutors will evaluate token drops based on the token’s characteristics, marketing promises, and the team’s claims about future utility. The more exaggerated and unmet the promises, the more likely these tokens will face scrutiny. Prosecutors use existing fraud statutes to assess meme coin offerings. If a celebrity meme coin appears to be a pump-and-dump scheme, it likely fits the criteria for fraud.

To prosecute a celebrity for a meme coin pump-and-dump, the government must prove the celebrity intended to defraud investors, acted with intent, used interstate communications, and impacted commerce. Proving these elements can be easy if the celebrity makes false statements to generate hype and attract buyers.

If celebrities or founders sell their tokens after inflating the price, causing significant losses to others, this can further support a fraud claim. Willful ignorance is generally not a defense in fraud cases. Meme coins can connect communities and create financial opportunities but also open the door to fraud and manipulation. Consumers must stay vigilant, and celebrities must understand the legal consequences of their actions.