In order to obtain the Smiley, the player must complete the map's main easter egg. Once it has been completed, the player can pick up the Smiley from the basement of the Bear Lodge, where it'll remain for the duration of the game.
It can also be obtained if someone in your lobby has Director's Cut. Just go to the basement of Bear Lodge, and interact with the hanging smiley next to the stairs.
It can be used in two different ways. If the player tries to shoot it like a normal weapon, it will cause the player to hold up the blade as it spins. If the player tries to aim down sights, it will shoot out a disc and ricochet for a few seconds, similarly to the D13 Sector from Call of Duty: Black Ops III.