Written by Mark Hiraide

You are a celebrity or a social media influencer and are asked by a company raising money from investors to post endorsements on Instagram.  The company’s White Paper identifies you as a “team member,” and the company refers to you as a member of their advisory board.  The company goes on to raise over $12 million from investors, but later goes bankrupt.[1]  Are you responsible to return the investors’ money?

Unfortunately for rapper Jayceon Terrell Taylor (the Game) the answer is, yes, according to a lawsuit filed by investors in a company he endorsed.  And last week, after Taylor failed to respond to the lawsuit, a federal court in Northern California agreed.  It rendered a $12,066,000 default judgment against Taylor for his role in promoting Paragon, a now defunct cannabis-related crypto company that raised $12 million in its 2017 ICO.  The Court found Taylor jointly and severally liable with Paragon and its founders. 

The Court concluded that Taylor’s role as a “celebrity endorser” to solicit investments was sufficient to support a finding that Taylor acted as a statutory “seller” of the Paragon coins, which the investors alleged were “securities.”  In 1988, in a landmark ruling, Pinter v. Dahl, the U.S. Supreme Court determined that a “person who successfully solicited the purchase” of a security and who is “motivated at least in part by a desire to serve his own financial interests or those of the security owner,” i.e., a “statutory seller” can be held liable to return all investors’ monies under Section 12(a)(1) of the Securities Act of 1933, while an individual who is merely a “collateral participant” cannot be held so liable. 

To hold an individual liable under this theory, the law requires the individual do more than just give gratuitous advice; it requires a showing that the individual solicited investors for personal gain.  However, in this case, the Complaint did not clearly allege that Paragon paid Taylor nor did the investors offer evidence of that fact.  Nevertheless, the Court concluded that the statements in the White Paper that suggested that team members received tokens and that Taylor would be considered a team member was sufficient to show that Taylor acted for his own gain or for Paragon’s gain and, thus, could be considered a statutory seller. 

The case is Astley Davy et al. v. ParagonCoin et al., case number 4:18-cv-00671, in the U.S. District Court for the Northern District of California.

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[1] Unfortunately for Taylor, he may be the only defendant with assets.  Last year Paragon reported that it was filing for bankruptcy stating, “[w]e never considered ourselves experts in the matter of US securities, therefore we sought out the guidance of highly recommended lawyers that were supposed to help, unfortunately they misguided and failed us.”