By Joseph Esses[1]
Market researchers suggest that the Esports industry will be over $200 billion in revenue during fiscal year 2022. That is a record year over year record increase of 5.4% compared to 2021. While the esports industry is continuing to climb in 2022, the cryptocurrency markets took a slide over the course of the year. That being said, it is clear that cryptocurrency will likely be here to stay in one way or another.
Although the esports and cryptocurrency markets had a very different 2022, the industries are interwoven and the success of one may directly affect the success of the other. Both industries are trying to overcome the challenges of being an outside threat to their traditional industry competitors while becoming interwoven into the very fabric of their respective industries (entertainment and financial investment). The synergies between these two industries have some interesting legal ramifications as it pertains to sponsorships.
One of the biggest reasons for the Esports industry’s 2022 success has been that the market for sponsorships in the esports industry continues to climb. Sponsorships make up the bulk of an esports organization’s funding. Similar to the traditional sports arena, esports companies have been flush with sponsorship revenue from cryptocurrency firms. Last summer, FTX entered into a 10-year, $210 million deal with Team SoloMid, the first deal between an esports team and cryptocurrency exchange and the largest sponsorship in team history. In discussing the success of FTX’s sponsorships in esports, company Founder and CEO Sam Bankman-Fried said “the amount of brand impact has been much greater from the esports side than it has from the traditional sports side” and that marketing metrics from their esports sponsorships have been “shockingly high.”
FTX isn’t the only crypto firm getting in on the esports sponsorship action. Coinbase sponsored organizations like Team Liquid, Evil Geniuses, and BIG in multimillion-dollar endorsement deals. Even the blockchain networks like the Tezos Foundation are using esports sponsorships to market their coins and NFT projects. Crypto firms want the esports audience and esports startups need the cash. Any organization that is engaging in an endorsement deal with a cryptocurrency company needs to be wary of the implications related to the Federal Trade Commission (“FTC”) Act and Securities and Exchange Commission (“SEC”) regulations that come with marketing these investment vehicles.
The FTC Act requires advertisers to avoid participating in unfair and deceptive trade practices. In today’s social media-driven world, one of the most important aspects of FTC Act compliance is the FTC’s “Guides Concerning the Use of Endorsement and Testimonials in Advertising.” When an individual or entity is working with a brand to endorse products, it needs to comply with the guidelines when making such an endorsement which means the endorsements need to be truthful and not misleading, the endorser must disclose any connection to the endorsed product, and the endorsement must represent generally expected results.
The most important aspect of the FTC endorsement guides is that the endorser needs to disclose when they have a financial, personal, or employment relationship with a brand. This disclosure can be as simple as using a hashtag (#ad, #sponsorship, etc.) but it needs to be in a prominent area on the post that is visible to the consumer. If the endorsement is in a video, the disclosure needs to be within the video. Similarly, if the endorsement is in a live stream, the disclosure should be repeated periodically so viewers who only see part of the stream will get the full disclosure.
Esports industry endorsements have been largely successful in ensuring that such endorsements comply with the FTC guidelines on advertising. It is quite simple to throw a hashtag in a post or in the background of a video when endorsing a product. However, the FTC has brought charges against esports influencers for violations of its guidelines in the past. Individuals and organizations in the Esports can follow these steps to ensure that their FTC disclosures are compliant with the agency’s guidelines: (1) ensure the endorsement is a predominant spot and is expressed in clear and simple terms; (2) endorsements in videos need to be within the actual video and not just the description, and (3) endorsements in live streams should be repeated periodically throughout the video. Cryptocurrency endorsements can be very beneficial for both esports organizations and cryptocurrency firms, but both parties need to ensure the other is complying with FTC regulations to avoid potential fines from the federal agency.
Aside from FTC compliance, esports companies endorsing cryptocurrency assets need to ensure they are complying with the regulations promulgated by the SEC. Recently, Kim Kardashian entered into a $1.26 million settlement with the SEC over a cryptocurrency endorsement of EMAX tokens for which she was paid $250,000. In addition to complying with the FTC Act, the SEC requires individuals and companies promoting securities to disclose how much they are being paid and by whom. This requirement is called the “anti-touting” provision which is intended to help investors know when a person has a conflict of interest that may have an impact on the endorser’s recommendation to buy or sell a security.
Unlike the FTC Act applying to all endorsements, SEC regulations only apply when the endorsement is related to a security. Whether a digital asset is a security or not is determined by the Howey test. This test states that a financial instrument is to be regulated as a security if there is an investment of money, the investment is made into a common enterprise, the investors expect to make a return from their investment and the expected returns are due to the actions of the promoter of the asset. The SEC has been very liberal in its determination of what is considered security. The agency has provided guidance that digital assets or tokens sold in initial coin offerings (“ICOs”) will likely be considered securities.
Esports entities that are endorsing a specific cryptocurrency asset need to ensure they comply with the SEC regulations or else they could be hit with a Kim Kardashian-like fine. Esports organizations that are endorsing Ethereum or Tezos tokens should look at the Kardashian case as a warning of the potential ramifications of entering into a sponsorship deal without the proper legal counsel. While these deals are incredibly lucrative, esports teams should ensure that they are making the proper disclosures when endorsing a particular digital asset. It is always better to err on the side of caution and over-disclose rather than get hit with an SEC investigation and fine.
The esports and cryptocurrency industries have incredible synergies as both markets are disruptors in their traditional market categories and draw in the same potential customers. While cryptocurrency deals can be extremely beneficial to an esports organization’s bottom line, esports endorsements of crypto need to ensure that such advertisements are in compliance with the FTC guides on endorsements and the SEC’s regulations related to marketing securities. If you have any questions about whether your cryptocurrency endorsement deal complies with the law, you should reach out to a legal professional to help you navigate the potential pitfalls of the deal.
[1] Joseph Esses is an Associate Attorney at the Gordon Law Group in the firm’s corporate practice group which works with e-sports, cryptocurrency, and affiliate marketing clients of all sizes.
