The US Court of Appeals for the Ninth Circuit recently held that a person who makes social media posts promoting securities—motivated at least in part by their own financial interests or those of the securities’ owner—is “selling” those securities for the purposes of Section 12 of the Securities Act of 1933.
The Pino v. Cardone Cap. LLC decision (see Pino v. Cardone Cap., LLC, No. 21-55564, 2022 WL 17826876 (9th Cir. Dec. 21, 2022)) widens a growing circuit split regarding who qualifies as a “seller” under Section 12 of the Securities Act of 1933 (the Securities Act), with some circuits holding that it includes those who make “mass communications to potential investors,” and others restricting it to persons who “direct[ly] and active[ly]” solicit a plaintiff’s individual investment. [1]
The plaintiff in Pino was an individual investor in two real estate investment funds, which he sued along with the funds management company and that company’s CEO. See Pino, 2022 WL 17826876, at *2. The securities at issue were offered pursuant to US Securities and Exchange Commission (SEC) Regulation A, which creates an exemption from registration for certain public offerings.
Among other promotional activities, the management company and its CEO had created Instagram posts and YouTube videos touting the alleged benefits of those funds. See id. They allegedly described the offering as “the first Regulation A of its kind to raise $50 Million in crowdfunding using social media,” with the CEO stating that “[b]y accessing social media, I am offering investment opportunities to the everyday investor, like you!” Id. One such video allegedly included the CEO’s statement: “You’re gonna walk away with a 15% annualized return. If I’m in that deal for 10 years, you’re gonna earn 150%. You can tell the SEC that’s what I said it would be.” Id.
The plaintiff alleged that this video—and other social media posts making similar representations—did not include any cautionary language indicating that these statements were speculative, nor did it otherwise describe the funds’ risks. See id. [2]
Section 12(a)(2) of the Securities Act imposes liability on “any person who . . . offers or sells a security . . . by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact . . . to the person purchasing such security from him.” 15 USC § 77l(a)(2).
The Supreme Court has held that “sell[ers]” of securities are not just people who pass title to those securities, but also anyone who “engages in solicitation,” meaning anyone who “solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner.” Pinter v. Dahl, 486 US 622, 647 (1988). Courts regularly dismiss Section 12(a)(2) claims if a plaintiff fails to allege facts indicating a defendant was a “seller” under this definition.
In Pino, the US District Court for the Central District of California dismissed the plaintiff’s claims for failure to plead facts establishing that the defendants were sufficiently “engaged in solicitation” to qualify as “sellers.” Pino, 2022 WL 17826876, at *3. Specifically, the District Court held that “the alleged solicitation consisted solely of statements made on social media highlighting the benefits of investing in the Funds,” and that there were no allegations that the defendants “directly and actively solicited [plaintiff’s] investment. . . .” Id. The plaintiff appealed to the Ninth Circuit Court of Appeals.
Ninth Circuit Holds ‘Mass Communications’ Through Social Media Constitute Solicitation
The Court of Appeals found that the case presented a question of first impression in the Ninth Circuit, namely, “whether the Securities Act requires that a seller must specifically target an individual purchaser’s investment, or whether Defendants’ indirect, mass communications to potential investors through social media posts and online videos counts as ‘engaging in solicitation’ . . . such that [Defendants] qualify as statutory sellers.” Pino, 2022 WL 17826876, at *4.
The Ninth Circuit concluded that “nothing in the Act indicates that mass communications, directed to multiple potential purchasers at once, fall outside the Act’s protections. On the contrary, the Act contains broad language authorizing the purchaser of a security to bring suit against ‘[a]ny person . . . who offers or sells a security . . . by means of a prospectus or oral communication’ that misleads or omits material facts.” Id. (emphasis in original) (quoting 15 USC § 77l(a)(2)). The court therefore reversed the District Court, holding that mass communications via social media qualify as “offer[ing] or sell[ing]” securities for purposes of Section 12 of the Securities Act. Id.
The Ninth Circuit’s decision in Pino is consistent with an Eleventh Circuit decision from earlier in 2022, which similarly held that videos posted publicly on YouTube and other websites can constitute solicitation under Section 12, even if the videos are not specifically targeted toward any individual purchasers. See Wildes v. BitConnect Int’l PLC, 25 F.4th 1341 (11th Cir. 2022).
However, these decisions are a departure from precedents in other circuits. For example, the Second Circuit has held that a plaintiff must show that the defendant “actually solicited” their specific investment in order for the defendant to qualify as a “seller.” Capri v. Murphy, 856 F.2d 473, 479 (2d Cir. 1988). Similarly, the Third Circuit requires a defendant to have engaged in “direct and active” solicitation of a plaintiff in order to qualify as a “seller.” Craftmatic Sec. Litig., 890 F.2d at 636. The Ninth Circuit in Pino declined to follow these and similar authorities without discussing them. Defendants in \may seek en banc review or later petition the Supreme Court for review to resolve this inconsistency between the circuits, but for the time being a defendant’s qualification as a “seller” for purposes of the Securities Act may differ depending on the jurisdiction in which an action against them is pending.
The Ninth and Eleventh Circuits’ decisions that social media posts directed toward “potential investors” can give rise to Securities Act liability are especially impactful in an era where businesses are increasingly turning to means of raising capital other than a registered securities offering. While not every court has adopted this standard, participants in securities offerings should exercise appropriate caution when making public statements about the securities in question—especially when it is possible that those statements will be widely disseminated via social media—to reduce their risk of exposing themselves to liability under the Securities Act.
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[2] The Ninth Circuit’s published opinion does not mention the actual offering circulars for the funds purchased by the plaintiff, which are available on the SEC’s website and describe the funds as speculative blind pool offerings. See, e.g., Cardone Equity Fund V, LLC Offering Circular dated December 11, 2018. In a separate, unpublished memorandum decision, the Ninth Circuit ruled that the plaintiff’s claims of misstatements in the offering circulars were properly dismissed, but also held that the risk disclosures in those documents were too general and too far removed in time from the challenged social media representations to protect the latter under the bespeaks caution doctrine. Pino v. Cardone Cap., LLC, No. 21-55564, 2022 WL 17834235 (9th Cir. Dec. 21, 2022).