INSIGHTS @ RICHT - NOVEMBER 2024

Practice Area: NFTs

The SEC's recent issuance of a Wells Notice to OpenSea, the leading NFT marketplace, highlights the ongoing regulatory uncertainty surrounding NFTs and their classification under securities law. This move suggests that the SEC is considering whether certain NFTs, particularly those involving a profit component, could be deemed securities, thereby subjecting them to registration requirements or necessitating an exemption. The legal considerations concerning NFTS in the securities law context revolve around the application of the Howey Test, which determines whether an asset qualifies as a security based on investment expectations and the reliance on others' efforts for profit. If NFTs are classified as securities, platforms like OpenSea would face significant regulatory burdens, including compliance with securities registration and disclosure requirements. This could also impact NFT creators and developers, potentially stifling innovation and altering the dynamics of the digital art and collectibles market. The CEO of OpenSea has stated on Twitter that the platform intends to fight any action by the SEC.

Note: After the election earlier in the month, and with the SEC chair Gensler resigning, these kinds of enforcement actions are in limbo, and many believe there will be a more lax regulatory approach to the crypto world.

Practice Areas: Influencer Marketing, Artificial Intelligence, Celebrity Endorsements

The Federal Trade Commission (FTC) has issued a final rule aimed at curbing deceptive practices in the realm of online reviews and testimonials. The rule explicitly prohibits businesses from creating, selling, or buying fake or false consumer reviews and testimonials, including those generated by artificial intelligence (AI) or those involving fake celebrity endorsements or similar influencer marketing. The rule also targets incentivized reviews, where compensation is offered for reviews expressing a particular sentiment and requires clear disclosure of any material connections between reviewers and businesses. Additionally, it bans the use of fake social media indicators, such as artificially generated followers or views, which mislead consumers about a business's popularity or credibility. These measures are designed to protect consumers from fraudulent practices, promote fair competition, and ensure that online marketplaces reflect genuine consumer feedback. The FTC's actions underscore the importance of transparency and honesty in digital marketing, with the agency empowered to seek civil penalties against violators to enhance enforcement and deterrence.

Practice Areas: Social Media, Children’s Privacy

TikTok faces a barrage of legal challenges across the United States. Attorney General Bob Ferguson of Washington state filed a lawsuit accusing TikTok of violating consumer protection laws by designing an addictive platform that harms youth mental health. Similarly, Massachusetts Attorney General Andrea Joy Campbell sued TikTok for intentionally creating an addictive platform harmful to young users. The Federal Trade Commission, through the Department of Justice, sued TikTok and ByteDance for violating children's privacy laws and infringing on a 2019 consent order. Additionally, a class action lawsuit resulted in TikTok agreeing to pay $92 million to settle claims of wrongfully collecting users' biometric information and private data. These lawsuits collectively allege that TikTok knowingly exploits children's vulnerabilities, deceives the public about its safety measures, and violates privacy laws. In addition, there is the big question about what happens to TikTok under President-elect Donald Trump in light of the law passed that requires divestiture.

Practice Areas: New York Privacy Law, Children’s Privacy

New York is taking significant steps to enhance privacy protection, particularly for children and young adults, despite not having a comprehensive state privacy law. The New York State Attorney General has released guidelines on website privacy controls, urging businesses to ensure transparency and accuracy in their tracking technologies and privacy practices.

When it comes to the personal information of children, the New York Child Data Protection Act introduces strict regulations for operators of websites, online services, apps, or devices that collect personal information from minors in New York. This law prohibits the processing of minors' data unless it's necessary for specific purposes or has obtained sufficient consent, similar to federal COPPA guidelines. Businesses need to review and update their tracking practices, ensure transparency in privacy disclosures, and align their operations with New York's consumer protection laws and other applicable regulations.

Practice Areas: Email Marketing

The Federal Trade Commission (FTC) has taken action against Verkada, alleging multiple violations, including inadequate information security practices, undisclosed employee reviews, and, notably, breaches of the CAN-SPAM Act.

The complaint, filed by the Department of Justice on behalf of the FTC, accuses Verkada of sending numerous commercial emails without providing unsubscribe options, failing to honor opt-out requests, and omitting physical postal addresses, all in violation of CAN-SPAM regulations. This enforcement action, resulting in a proposed $2.95 million fine, marks the largest penalty ever imposed for CAN-SPAM violations and serves as a stark reminder for businesses to ensure compliance with email marketing laws.