Navigating the World of Influencer Advertising: Key Legal Considerations

7 Min Read By: Dennis Siaw-Lattey May 15, 2023

The ubiquity of social media has been accompanied by an advertising boom that is lucrative for influencers and brands alike. The benefit to companies is immense because of lower costs compared to traditional advertising methods. For a fraction of the price of traditional radio, television, or print advertising, influencers can reach thousands, sometimes millions of followers with brand recommendations. However, the relationships come with serious risk for companies choosing to tie their reputation to influencer accounts and personalities.

As of 2022, the average daily social media usage of internet users worldwide amounted to 147 minutes per day, up from 145 minutes in the previous year.^[1] In 2021, Americans spent on average more than 1,300 hours on social media.^[2] It is no wonder businesses find it valuable to capture even a fraction of that screen time for social media advertising. Social media advertising through influencers allows brands to reach individuals who may otherwise not encounter their product. Gamers, makeup artists, musicians, and socialites can amass large numbers of followers attracted to their personality, celebrity status, content, or expertise in a certain field. To influencers’ followers, a brand recommendation from a trusted influencer is akin to a referral from a friend. Companies see the benefit in these interactions and pay lucrative contracts to capitalize on the relationships built by influencers.

Influencer Code of Conduct

While this kind of advertising can be profitable for both influencer and brand, there are risks associated with tying a company’s image to an individual. The publicly expressed opinions and behavior of the influencer, as well as their political and social leanings, may not always align with the values of the brand. On a grand scale, there have been instances where famous individuals lost sponsorships after unfavorable public incidents. For example, golfer Tiger Woods lost his sponsorships with Gatorade, AT&T, and Gillette in the wake of his alleged extramarital affairs. More recently, Adidas faced immense pressure to break ties with artist Ye, formerly known as Kanye West, in the wake of his social media and public statements on race and politics, particularly antisemitic posts on Instagram and Twitter; Adidas and a wide range of other brands eventually cut ties with Ye. On a smaller scale, brands utilizing social media influencers must conduct the same evaluation of whether an influencer’s words or actions should continue to be associated with the brand. Often the solution is to disassociate with the influencer to avoid the perception of being complicit or tacitly approving of the actions of their brand ambassador.

Influencer contracts or influencer marketing agreements set forth the relationship between the parties and outline, for instance, the amount of content an influencer must generate to earn compensation. Additionally, moral/conduct clauses are essential to permit the brand to terminate a contract when the actions of the influencer fail to align with the brand’s values. Such contracts are an excellent tool for managing what can sometimes be unpredictable business relationships. The contracts, however, do not always account for conduct that occurred prior to the inception of the marketing relationship. In that regard, thorough and comprehensive vetting prior to entering into an influencer agreement is essential.

Internet activity, unless purposefully removed, is stored and accessible for years. With throngs of relentless internet sleuths digging into every post, like, and interaction, there have been countless instances of previous conduct, sometimes decades old, inciting public uproar. In 2022, media and fans called for corporate sponsors to reevaluate their relationship with the Dallas Cowboys after a 1957 photo surfaced of owner Jerry Jones at a Little Rock, Arkansas, protest against school integration. Former players and colleagues jumped to Jones’s defense; the outrage eventually quieted, and sponsors remained in place. However, Jones’s story shows the precarious position in which brands may find themselves when the influencer relationship draws public ire for past behavior. Contracting parties must address this reality to ensure there are clear grounds for severing the sponsorship relationship.

As with any contracting relationship, prevention is better than cure. I am reminded of the proverb cautioning the reader to walk with the wise and become wise, instead of making companionship with fools and suffering harm. The notion holds true in the ever-evolving world of social media influencer advertising. The choice of a social media partnership should come down to more than just the number of followers. Companies and brands must exhaustively vet influencers’ online presences and must account for conduct-based severance terms in their influencer contracts/influencer marketing agreements.

Compliance with FTC Disclosure Requirements

Influencers must be aware of their responsibility to conspicuously disclose endorsements, sponsorships, and partnerships with brands and companies. The Federal Trade Commission (“FTC”), in its efforts to protect consumers from deceptive advertising, has turned a keen eye to the prevalent use of influencer advertising. One of the most common pitfalls for influencers is the failure to clearly disclose partnerships, which can lead to deceptive advertising. To that end, the FTC released a guide to influencers, “Disclosures 101 for Social Media Influencers” (the “Guide”) which provides a condensed and simple reference tool for social media advertising.^[3] The Guide warns, “If you endorse a product through social media, your endorsement message should make it obvious when you have a relationship (‘material connection’) with the brand. A ‘material connection’ to the brand includes a personal, family, or employment relationship or a financial relationship – such as the brand paying you or giving you free or discounted products or services” (emphasis added). Thus, even brand publicity in exchange for free products requires adherence to the strict disclosure guidelines. The simple reference tool of the Guide can save influencer clients from losing brand opportunities, or worse, facing legal consequences for false advertising. Practitioners should keep an eye on the FTC’s regulation in this field, as the Commission has approved a request for comment seeking public input on proposed changes to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising.^[4] This development signals an impending change and likely stricter regulation of influencer advertising.

SEC Prosecution of Deceptive Advertising in Securities

Practitioners must also advise influencers of the pitfalls of promoting or encouraging the public to purchase stocks and other investments. In a November 1, 2017, statement, the Securities and Exchange Commission (“SEC”) cautioned celebrities “and others” against endorsing the purchase of stocks. The SEC warned those endorsements could be unlawful without disclosure of “the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”^[5] Recent prosecution by the SEC shows the warning was not toothless.

In December 2022 the SEC charged eight social media influencers in a $100 million stock manipulation scheme promoted on Twitter and Discord.^[6] As described by Joseph Sansone, chief of the SEC Enforcement Division’s Market Abuse Unit, the SEC complaint filed in the US District Court for the Southern District of Texas alleged the defendants “used social media to amass a large following novice investors and then took advantage of their followers by repeatedly feeding them a steady diet of misinformation, which resulted in fraudulent profits of approximately $100 million.”^[7] Despite the seriousness of this example, social media activity promoting securities need not be nefarious to draw the SEC’s attention; failure to disclose partnership and sponsorship is sufficient for prosecution.

Several recent SEC prosecutions highlight the importance of properly disclosing sponsorships and compensation. Socialite and media personality Kim Kardashian reached a $1.26 million settlement with the SEC over a 2021 post promoting cryptocurrency without disclosing the amount she was paid for the advertisement.^[8] The same fate befell boxer Floyd Mayweather Jr. and music producer DJ Khaled, who also failed to disclose payments in exchange for promoting companies purporting to sell securities.^[9] As social-media-propelled investment opportunities such as non-fungible tokens (“NFTs”) and cryptocurrency increase in popularity, it is tempting to push social media posts promoting these items. Practitioners must advise against doing so without adequate scrutiny of the brand/company, without understanding the assets to be promoted, and most importantly, without disclosing the nature of the sponsorship and compensation. Consumer transparency remains the paramount concern of the FTC and SEC. Following a few simple publicly available guidelines may help to avoid prosecution.