What do you get when you combine the Depression-era U.S. securities laws with today’s social media environment? A circuit split, of course.
The digital transformation in communication has brought to the forefront a pressing legal issue: the extent to which social media posts can lead to liability under Section 12 of the Securities Act of 1933. One of the key issues is whether individuals or entities that use social media to promote securities can be considered “sellers,” making them liable for potential misstatements or omissions in their posts.
This matter gained significant attention with the Ninth Circuit’s decision in Pino v. Cardone Capital LLC, 55 F. 4th 1253 (9th Cir. 2022). In Pino, the Ninth Circuit held that promoting securities through social media could indeed constitute “selling,” subjecting the promoters to potential liability under Section 12(a)(2). This decision not only highlights the evolving nature of securities promotion in the digital age but also underscores a growing disparity among various judicial circuits on how to interpret these laws in the context of modern technology.
Background on Securities Promotion and Social Media
Social media has dramatically transformed securities promotion. Platforms like Twitter, Instagram, and YouTube are now powerful tools for individuals and entities to discuss, endorse, and promote various investment opportunities. Such promotion is more accessible and reaches a far wider audience than traditional methods. It allows for direct, real-time engagement with potential investors, making it an attractive avenue for companies and influencers alike.
But social media also entails unique challenges and risks. The potential dissemination of false or misleading information, whether intentional or not, is amplified by the broad reach of social media. That can create significant market impact in a short time. A related risk is less checks and balances since the informality and immediacy of social media can lead to less rigorous information vetting compared to traditional investment disclosures. Regulators, not to mention plaintiffs’ lawyers, are taking notice.
For example, in December 2022, the SEC charged eight social media influencers with securities fraud in a $100 million scheme. These individuals allegedly used Twitter and Discord to manipulate exchange-traded stocks. They cultivated a substantial following on these platforms, promoting certain stocks, and then sold their shares for profit (i.e., “pump and dump”) when the prices rose, all without disclosing their plans to their followers.
In the context of U.S. securities law, Section 12 of the Securities Act of 1933 is particularly relevant to the issue of social media and securities promotion. This section addresses the liability associated with false or misleading statements in the context of selling or offering to sell securities. Sections 12(a)(1) and (2) permit a private right of action based on the failure to register securities with the SEC without a proper exemption (12(a)(1)) and for the offer or sale of securities by means of a prospectus or an oral or communication that contained material misstatements or omissions (12(a)(2)). But the Supreme Court has held that a statutory seller under Section 12 is limited only to those who passed title to the securities or who solicited the purchase.
The application of Section 12 to social media posts is a developing area of law, as demonstrated by cases like Pino v. Cardone Capital LLC, which grapple with the definition of “selling” in the context of online promotions.
The Pino Decision
The Pino v. Cardone Capital LLC case revolved around the promotion of securities on social media platforms Instagram and YouTube, by Grant Cardone and his company, Cardone Capital, LLC.
The plaintiff, Luis Pino, invested in funds managed by Cardone Capital and later filed a class action lawsuit, alleging that the defendants violated Section 12(a)(2) of the Securities Act by making materially misleading statements and omissions in their social media posts promoting the investment in these funds.
The core legal question was whether Cardone and his company could be considered as "sellers" under Section 12(a)(2), even though they did not directly solicit Pino’s investment. The federal district court ruled that Cardone was not a “seller.” However, the Ninth Circuit reversed, concluding that indirect, mass communications to potential investors through social media posts and online videos can qualify as “solicitations” sufficient to impose liability under Section 12(a)(2). The court explained that: “§ 12 of the Securities Act contains no requirement that a solicitation be directed or targeted to a particular plaintiff . . . [and] that a person can solicit a purchase, within the meaning of the Securities Act, by promoting the sale of a security in a mass communication.”
The Circuit Split
The Ninth Circuit’s ruling follows the reasoning of the Eleventh Circuit in the case Wildes v. BitConnect Int’l PLC, No. 20-11675 (11th Cir. Feb. 18, 2022), which also held that videos posted on YouTube and other platforms can constitute solicitation under Section 12, even if not targeted toward any individual purchasers.
However, these decisions are at odds with previous rulings in other courts, such as the Second and Third Circuits, which interpreted the criteria for what constitutes a “seller” under Section 12 more narrowly. These circuits generally require a more direct relationship between the buyer and the seller, focusing on the proximity of the parties involved in the transaction. The emphasis is on the direct solicitation of the sale by the person deemed a seller, a standard that may not easily encompass indirect or mass communications like social media posts. For example, the Second Circuit, in Capri v. Murphy, 856 F.2d 473, 479 (2d Cir. 1988), held that a plaintiff must demonstrate the defendant “actually solicited” the plaintiff's specific investment in order for the defendant to qualify as a seller under Section 12.
This circuit split reflects the ongoing challenge of applying traditional securities law to the modern, digital landscape. Understanding these differing interpretations is crucial for anyone involved in promoting securities, whether through traditional channels or modern platforms like social media. The evolving legal landscape underscores the importance of being aware of the specific legal standards in each jurisdiction to avoid potential liabilities.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, or Joshua Korr.
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