Beware of Social Media When Promoting Investment Services

Practitioners should be aware that on December 21, 2022, a panel of the Ninth Circuit Court of Appeals held in Pino v. Cardone Capital, LLC, that a company (Cardone Capital, LLC) and its CEO (Grant Cardone) qualified as “statutory sellers” pursuant to §12(a)(2) of the Securities Act of 1933 and therefore could be held liable for materially false and misleading social media posts to Instagram and YouTube. In so holding, the Ninth Circuit joined the Eleventh Circuit, which recently held in Wildes v. BitConnect Int’l PLC, that videos posted publicly on YouTube and similar websites can constitute solicitation under section 12, even if the offering’s promoters did not directly target the particular purchasers. The Ninth Circuit explained that “the Eleventh Circuit correctly recognized that nothing in §12 expressly requires that solicitation must be direct or personal to a particular purchaser to trigger liability under the statute.” Opinion at 10–11. “Put differently, nothing in the Act indicates that mass communications, directed to multiple potential purchasers at once, fall outside the Act’s protections.” Id. at 11.

In so concluding, the Ninth and Eleventh Circuits focused on the definition of “prospectus,” which is statutorily defined to mean “any prospectus, notice, circular, advertisement, letter, or communication, written or by radio or television, which offers any security for sale or confirms the sale of any security.” §77b(a)(10). Based on this definition, the Ninth Circuit concluded that while “the Securities Act of 1933 predates the internet, the inclusion of radio and television communications indicates Congress contemplated that broadly disseminated, mass communications with potentially large audiences would fall within the Act’s scope.” Opinion at 11. Finally, the Ninth Circuit explained that such a holding was consistent with the Supreme Court’s recognition in Pinter v. Dahl that “solicitation is the stage at which an investor is most likely to be injured, that is, by being persuaded to purchase securities without full and fair information.” 486 U.S. 643, 646–47 (1988).

Practitioners should be aware that section 12(a)(2) liability—at least in the Ninth and Eleventh Circuits—can, in certain circumstances, extend to social media posts and mass communications, and should counsel their clients responsible for communicating with investors (or potential investors) accordingly.