The Analytical Musician

Music Endorsements

The music industry relies heavily on endorsements of related and non-related products. This income has become highly lucrative for established artists beyond their artistic endeavors. For companies, the celebrity endorsement is an essential part of a marketing plan and often is a means to differentiate between competing products. According to Dean Crutchfield, Americans are exposed to over 3,000 commercial images and brands daily. Market researchers have pointed out that a person can only record 150 images, with only a percentage reaching the conscious mind. Given the competitive nature of the business world, companies are constantly looking for techniques to increase brand awareness. Celebrity endorsements have become a vital communication tool in an ever-competitive market. When an artist aligns themselves with a particular product, it not only certifies the brand but adds stature to the product to the consumer. The principle of endorsements operates on four assumptions. First, the trustworthiness and credibility of the celebrity. Second, the likeability of a celebrity endorser within a specific market. Third, a match (identifiable attributes) between a celebrity endorser and the target audience. Finally, the expertise of a celebrity endorser in a specific field. (Crutchfield)

The collapse of the cryptocurrency exchange company FTX is an important case in the business realm and celebrity endorsements. FTX was a mobile investment service that allowed customers to place cryptocurrency trade orders. Founded in 2019, it soon became a leader in the online trade of cryptocurrencies, amassing approximately $10 to $50 billion. (https://www.businessinsider.com/ftx-crypto-king-sam-bankman-fried-rise-and-fall-2022-11) After Changpeng Zhao, the CEOP of the firm Binance liquated approximately $530 million of tokens and causing a rush of investors to disinvest approximately $6 billion within 72 hours. (https://www.businessinsider.com/ftx-crypto-king-sam-bankman-fried-rise-and-fall-2022-11) Within a week, the company lost 94% of its net worth, and FTX CEO, Samuel Bankman-Fried filed for bankruptcy. A class action suit was filed in Miami against several prominent sports and entertainment celebrities on November 15, 2022. The suit accused the celebrities of deceiving unsophisticated investors into purchasing FTX cryptocurrencies. It is the first time such as suit has been filed against celebrities for endorsements and could present a major change in how artists/entertainers utilize endorsements as part of their business functions in the future. 

The Federal Trade Commission (FTC) and Securities and Exchange Commission (SEC) both understand the importance of endorsements to companies, celebrities, and consumers. The FTC recognizes the influence celebrities’ have on consumers purchasing endorsed products. The mission of the FTC is to protect consumers from deceptive practices. Under Title 16 (commercial code) of the FTC, part 255 clearly defines endorsements as:

“any advertising message (including verbal statements, demonstrations, or depictions of the name, signature, likeness, or other identifying personal characteristics of an individual or the name or seal of an organization) that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser.” (https://www.ftc.gov)

The FTC is responsible for how endorsements are defined and viewed by consumers. For example, the FTC will investigate if an endorsement is misleading to a consumer acting reasonably under the circumstances. (https://www.ftc.gov) The SEC has similar rules regarding endorsements related to the public purchasing stocks and other investments. (https://www.sec.gov) The SEC requires celebrities who endorse these products to reveal the scope of their connection with the financial agent and compensation they receive in exchange for the promotion. Failing to indicate this information may violate federal securities laws. Such was the case of DJ Khaled, charged with unlawful touting (aggressive sales) for endorsing a cryptocurrency company, Centra Tech. In this case, the SEC accused Khaled of, “failing to disclose payments received for promoting investments in Initial Coin Offerings.” (https://www.sec.gov) The SEC stated that Khaled received a $50,000 payment from Centra Tech for endorsing their cryptocurrencies on his social media accounts which he stated were a “game changer.” Khaled agreed to pay the SEC $50,000, a $100,000 penalty, and $2,725 in interest. Furthermore, Khaled was not allowed to promote securities for two years. (https://www.sec.gov)

The Centra Tech and the FTX cases define the scope of celebrity endorsement regarding sponsored products, especially financial instruments such as cryptocurrencies. Federal agencies, such as the SEC, clearly indicate that full disclosure of the relationship between a company and a celebrity endorsement must accompany the advertisement. Celebrities must be transparent to appear unbiased in their statements. The recent case of the FTX endorsement should be a warning to those in the music industry, as the line between “expert investment advice” and paid promotion warrants increased scrutiny by government agencies and individuals. Celebrities and their management teams must carefully examine the impact and earnings gained from these partnerships and the legal implications that may result in accusations of fraudulent behavior.