By: Seth Bilbrey
With venture capital firms and other investment companies flocking to social media to promote investment projects, courts are being forced to look at a depression era securities law to determine what exactly a “seller” is.[1] The 1933 Securities Act (“Securities Act”) has allowed investors who have purchased unregistered securities, or who were potentially defrauded, to sue the seller and to seek a refund.[2] Cryptocurrency and other investment projects being promoted on social media are testing the definition of “seller” under the Securities Act and lower courts are increasingly asked to determine whether online videos promoting crypto tokens are “solicitation[s] that makes someone a seller.”[3]Lower courts’ interpretations of what a “seller” is have muddied the water for investment firms who are questioning what they may promote online without being subjected to a lawsuit.[4]
In early October, 2023, the Supreme Court refused to grant certiorari for a case involving Cardone Capital LLC, a real estate management company.[5] A California district court found that Grant Cardone, the defendant company’s CEO, was not a “seller” when an investor sued in 2020.[6] The district court relied on a Supreme Court case Pinter v. Dahl, a key case explaining when someone is a seller.[7] Pinter holds that a person is a “seller” within the meaning of the Securities Act if they “either: (1) passe[d] title to the securities to the [purchaser]; or (2) solicit[ed] the purchase, motivated in part by [their] own financial interests.”[8] Further, to “solicit” a purchase “a defendant must do more than merely assist in a solicitation or publicly recommend a security . . . instead, a defendant must actively and directly solicit the plaintiff’s investment.”[9]
An investor, Pino, filed a class action against Cardone, asserting that Cardone violated § 12(a)(2) of the Securities Act.[10] Pino alleged that Cardone made “untrue statements of material fact or concealed or failed to disclose material facts in Instagram posts and a YouTube video in 2019.”[11] In an April 22, 2019, YouTube video, Cardone stated that, “it doesn’t matter whether [the investor] [is] accredited [or] non-accredited … you’re gonna walk away with a 15% annualized return ….” In the district court, it was noted that Cardone was not a seller within the first prong of the Pintertest (as title was not passed), and further, Cardone was not found to be a “seller” under the second prong because the “plaintiff [never alleged] that Cardone or Cardone Capital was “directly and actively” involved in soliciting Plaintiff’s investment, [n]or that Plaintiff relied on such a solicitation when investing.”[12] However, the Ninth Circuit reversed.[13]
The Ninth Circuit, following the reasoning in a recent decision from the Eleventh Circuit, held 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.”[14] The Ninth Circuit further held that Pino (the investor suing Cardone), “need not have alleged that he specifically relied on any of the alleged misstatements.”[15]
The Ninth Circuit opinion came after the Eleventh Circuit case, Wildes v. BitConnect International PLC.[16] TheWildes court noted that, “when a person solicits the purchase of securities to serve [their] financial interests, [they are] liable to a buyer who purchases those securities – whether that solicitation was made to one known person or to a million unknown ones.”[17] More importantly for this matter, the promoters in the Wildes case used publicly available videos to convince the plaintiffs to purchase BitConnect through referral programs and “earned a commission on those investments.”[18]
The court in Wildes emphasized why the Securities Act of 1933 is still, if not more, relevant today, as “[t]technology has opened new avenues for both investment and solicitation[;] sellers can now reach global audience[s] through podcasts, social medial posts . . . online videos[,] and web links.”[19] The court goes on to note that, under a restricted reading of the Securities Act, “a seller who would be liable for recommending a security in a personal letter could not be held accountable for making the exact same pitch in an internet video – or through other forms of communication listed as exemplars in the Securities Act, like circulars, radio advertisements, and television commercials.”[20] This ruling would make no sense; a “seller” should not be able to avoid lawsuit “through his choice of communications – especially when the Act covers ‘any means’ of ‘communication.’”[21]
Although the Supreme Court declined to grant certiorari for the Cardone case, it is likely only a matter of time until a similar case makes its way up the judicial ladder. When the next case makes it to the country’s highest court, the Supreme Court should look carefully at both the Ninth and Eleventh Circuits reasoning in Cardone and Wildes, respectively, and hold that solicitations to a million unknown people is the same with respect to the Securities Act as is a solicitation to one known person.[22] Jeffrey Steinfeld, a securities and litigation partner at Winston & Strawn LLP, summarized this line of reasoning when he said, “if you’re making a public statement urging or persuading someone to invest in security XYZ, then you’ve solicited.”[23] Social media and technology have opened countless new avenues for solicitation, allowing promoters and investors to reach millions with the click of a button; the Supreme Court’s decision should make promoters and investors think twice before posting.[24]
[1] Matthew Bultman, Instagram Promoters Test Limits of a 90-Year-Old Securities Law, Bloomberg Law (October 29, 2023, 10:17 PM), https://news.bloomberglaw.com/business-and-practice/instagram-promoters-test-limits-of-90-year-old-securities-law?context=search&index=39.
[2] Bultman, supra note 1.
[3] Id.
[4] Id.
[5] Id.
[6] Pino v. Cardone Cap. LLC., No. 20-CV-8499, 2021 U.S. List. LEXIS 166042, at *48 (C.D. Cal. Apr. 27, 2021), rev’d, 55 F.4th 1253 (9th Cir. 2022).
[7] Id.
[8] Pino, 2021 U.S. List. LEXIS 166042, at *19 (citing Pinter v. Dahl, 486 U.S. 622, 647-48 (1988)).
[9] Pino, 2021 U.S. List. LEXIS 166042, at *19 (citing Steed Fin. LDC v. Nomura Sec. Int’l, Inc., 2001 WL 1111508, at *7 (S.D.N.Y. 2001).
[10] Pino v. Cardone Cap., LLC, 55 F.4th 1253, 1256 (9th Cir. 2022)
[11] Id.
[12] Pino, 2021 U.S. List. LEXIS 166042, at *19.
[13] Pino v. Cardone Cap. LLC., No. 20-CV-8499, 2021 U.S. List. LEXIS 166042, at *48 (C.D. Cal. Apr. 27, 2021), rev’d, 55 F.4th 1253 (9th Cir. 2022).
[14] Pino, 55 F.4th at 1260; Wildes v. BitConnect Int’l PLC, 25 F.4th 1341, 1347 (11th Cir. 2022) (noting that a person can solicit the purchase of securities whether that solicitation was made to one known person or to a million unknown ones).
[15] Pino, 55 F.4th at 1260 (citing Smolen v. Deloitte, Haskins & Sells, 921 F.2d 959, 965 (9th Cir. 1990) (holding that “[R]eliance is not an element of a section 12(2) claim.”)).
[16] Pino, 55 F.4th at 1253; Wildes, 25 F.4th at 1341.
[17] Wildes, 25 F.4th at 1347.
[18] Id.
[19] Wildes, 25 F.4th at 1346.
[20] Id.; 15 U.S.C. §§ 77e(a)(1), 77(b)(a)(10).
[21] Wildes v. BitConnect Int’l PLC, 25 F.4th 1341, 1347 (11th Cir. 2022); 15 U.S.C. §§ 77e(a)(1).
[22] Pino v. Cardone Cap., LLC, 55 F.4th 1253, 1253 (9th Cir. 2022); Wildes, 25 F.4th at 1347.
[23] Bultman, supra note 1.
[24] See Wildes, 25 F.4th at 1346.
