The advent of social media has revolutionized the way we communicate, share information, and make decisions. This transformation has permeated the financial world as well, with a significant impact on investment promotion and securities laws.

According to recent data, 75% of investors now use social media to inform investment decisions. This shift in investor behavior has necessitated a change in the role of investor relations, requiring collaboration with more internal stakeholders than ever before.

Investor relations leaders have an opportunity to reshape their engagement strategy to harness this powerful communications channel. Platforms like Reddit and Twitter have become popular destinations for retail and institutional investors to discuss and analyze market trends. From an education and connection standpoint, it is critical to ensure that the right content, facts, and investor messaging come directly from the company for investors to find on social media.

The Challenge of Outdated Securities Laws

While social media offers numerous benefits for investment promotion, it also presents challenges for outdated securities laws. Rapid technological change has resulted in novel regulatory issues and challenges, as law and policy struggle to keep pace. 

The U.S. Securities and Exchange Commission (SEC) acknowledges that the U.S. capital markets are the deepest, most dynamic, and most liquid in the world. However, as technological advancements and commercial developments have changed how our securities markets operate, our ability to remain an effective regulator requires us to continuously monitor the market environment and adjust our expertise, rules, regulations, and oversight tools.

The enforcement of regulation is another challenge. Weaknesses in enforcement have been targeted by the G-20 as a priority concern for reform. Noncompliance with securities law can have serious system-wide impact and the credibility of the system as a whole rests on the existence of effective discipline—the probability of real consequences for failure to obey the law.

Instagram Promotions

The advent of social media has not only transformed the way we communicate and share information, but it has also significantly impacted the world of finance and investment. One such instance is the case of Instagram promoters testing the limits of the 90-year-old Securities Act.

Federal law has long provided investors who are defrauded or who bought an unregistered security with the right to sue the seller, seeking a refund. This law has been in place for decades, providing a safety net for investors. However, with the rise of new kinds of investments, including crypto projects promoted on social media, this law is being tested.

Instagram, with its vast user base and visual appeal, has become a popular platform for promoting investments. Promoters often use enticing images and persuasive language to attract potential investors. However, these promotions have raised questions about the definition of a “seller” under federal law.

The Case of Cardone Capital LLC

The case of Cardone Capital LLC illustrates how social media can challenge securities laws. In this case, Luis Pino brought claims under Section 12 (a) (2) of the Securities Act against all Defendants, including Cardone Capital LLC. The issue was whether Cardone Capital counts as persons who “offer or sell” securities under Section 12 (a) based on their social media communications to prospective investors.

The district court concluded that Cardone Capital did not qualify as statutory sellers. However, the Ninth Circuit affirmed in part and reversed in part the district court’s dismissal pursuant to Federal Rule of Civil Procedure 12 (b) (6). The panel concluded that Section 12 contains no requirement that a solicitation be directed or targeted to a particular plaintiff. Therefore, a person can solicit a purchase within the meaning of the Securities Act by promoting the sale of a security in mass communication.

While social media has become an indispensable tool for investment promotion, it also poses significant challenges for securities laws. It is crucial for regulators to adapt and evolve their policies to keep pace with technological advancements. This will ensure that they can effectively regulate the market environment and maintain the credibility of the system.