KOL Promotion and Unfair Trading Liability in Token Marketing Agreements

Structuring control over promotional content, trading restrictions on token compensation, disclosure of interests, and liability for breach

When a token project engages KOLs (key opinion leaders) and marketing agencies for promotion, the content of the promotion and the compensation structure may raise issues of fraudulent unfair trading under Korea's Act on the Protection of Virtual Asset Users. If tokens paid as compensation are sold immediately after the promotion, or unfounded price forecasts are circulated, not only the KOL but also the project may become the subject of an investigation.

This article summarizes the key points to review in token marketing agreements: control over promotional content, lock-ups and trading restrictions on token compensation, disclosure of interests, and allocation of liability for breach.

1. Unfair Trading Rules Applicable to KOL Promotion

The Act on the Protection of Virtual Asset Users prohibits any person from using fraudulent means, or seeking profit through information that falsely represents material facts, in connection with the trading of virtual assets (Article 10). The prohibition also applies to project foundations and individual KOLs that are not virtual asset service providers.

Violations may result in imprisonment for at least one year or a fine of three to five times the unlawful gains, and a separate administrative penalty of up to twice the unlawful gains may be imposed (Articles 17 and 19).

In the capital markets, so-called scalping, in which a person buys a stock in advance, recommends it through a broadcast, and then sells it, has been punished as fraudulent unfair trading. The fraudulent trading provision of the Act on the Protection of Virtual Asset Users may be interpreted in the same way.

2. Control and Pre-Review of Promotional Content

A KOL agreement should define the scope of information that may be used in promotion. It should be based on the white paper and disclosures published by the project, and prohibit the use of unconfirmed partnership or listing news.

The agreement should expressly prohibit guaranteed returns, target prices, and suggestions of short-term price surges, and require review by the project before posting.

A clause requiring retention of review records and original posts provides evidence, if a problem arises, that the project did not direct false content.

3. Lock-Ups and Trading Restrictions on Token Compensation

When promotion is compensated in tokens, the KOL benefits as the price rises. If large sales follow immediately after the promotion, the arrangement can easily cause investor harm and attract suspicion of fraudulent trading.

The parties should consider applying lock-ups and staged vesting to the tokens paid, and prohibiting trading of the token for a certain period before and after the promotion. Requiring the KOL to report wallet addresses and trading records makes it possible to verify compliance.

Even where cash compensation is chosen, the agreement should include representations and warranties that the KOL has not separately acquired the token. Arrangements that also delegate trading activities require a separate review of market manipulation issues under market making agreements.

4. Disclosure of Interests and Management of Agencies

If the fact that promotion is paid is concealed, investors may mistake it for independent opinion. The Korea Fair Trade Commission's Guidelines for Reviewing Endorsement and Testimonial Advertising also require disclosure of economic interests with the advertiser.

The agreement should require each post to disclose that it is a paid advertisement or sponsored content, and provide that compensation will be withheld or refunded if this obligation is breached.

If an agency engages multiple KOLs on its own, the same obligations should apply to those sub-KOLs, and the agency should be responsible for their compliance.

5. Termination and Allocation of Liability for Breach

If a KOL or agency uses prohibited expressions or breaches trading restrictions, the project should be able to terminate immediately and recover the tokens and fees paid.

A clause requiring the KOL and agency to cooperate in providing materials is also needed if the project becomes subject to a regulatory investigation or an exchange review. If abnormal trading is identified, an exchange may consider terminating trading support, which can cause direct losses to the project.

However, indemnity clauses in an agreement cannot shield a party from criminal liability or administrative penalties. If the project directs false promotion or coordinates the timing of sales, it may be directly liable regardless of the agreement.

6. Implications for Businesses

The legal risks of KOL promotion often arise from the compensation structure and the timing of trades rather than from the promotional wording itself. Including lock-ups, trading restrictions, and wallet reporting obligations for token compensation is a means of protecting investors while managing the scope of the project's liability.

Because contractual indemnities alone cannot avoid criminal liability and administrative penalties, projects should also establish internal approval procedures and record management for promotion.

Related Laws and References

Korea Law Information Center — Act on the Protection of Virtual Asset Users, Articles 3, 10, 17 and 19

Korea Law Information Center — Guidelines for Reviewing Endorsement and Testimonial Advertising