Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio.
Speaker 2: So today we're announcing a federal lawsuit against Meta. Met
Speaker 2: of course, is the parent company of Instagram and Facebook,
Speaker 2: for knowingly harming the mental health of young social media users.
Speaker 1: Meta Platforms is being sued by forty one states who
Speaker 1: claimed that social media platforms Instagram and Facebook exploit young
Speaker 1: people for profit by building an addictive features that are
Speaker 1: harming their mental health. At a press conference of the
Speaker 1: Attorney General of Washington State, Bob Ferguson, two teenagers described
Speaker 1: their struggles coping with social media sites like Instagram.
Speaker 3: The worst part was these pictures and videos were never ending.
Speaker 3: The addictive algorithm and the constant flood of new content
Speaker 3: kept me glued to my phone, and before I knew it,
Speaker 3: I began to hate myself and.
Speaker 4: The way I looked.
Speaker 3: This all happened before I.
Speaker 4: Turned thirteen, as I would go on my phone intending
Speaker 4: to do other things and then instinctively start opening up Instagram,
Speaker 4: opening up different social media platforms without even meaning to,
Speaker 4: and then getting stuck in the cycle of scrolling seeing
Speaker 4: other people's lives and interactions.
Speaker 1: Ferguson said, Meta knowingly misled users and hooked youngsters with
Speaker 1: psychologically manipulative product features.
Speaker 2: They tap into their so called fear of missing out,
Speaker 2: discouraging them from leaving the apps once they are logged on.
Speaker 2: Meta is aware of the addictive nature of these features
Speaker 2: for young people and the risks that they pose. The
Speaker 2: original developer of the infinite scroll concept Liken the feature too,
Speaker 2: and I'm quoting now behavioral cocaine.
Speaker 1: Thirty three states are filing a joint lawsuit in federal
Speaker 1: court in California, while attorneys general for d and eight
Speaker 1: other states are filing separate complaints in federal, state or
Speaker 1: local courts. Joining me is Bloomberg Intelligence analyst Matthew Shettenhelm.
Speaker 1: Matt tell us about the federal lawsuit.
Speaker 5: So yesterday over thirty states filed in federal court in California,
Speaker 5: basically using their consumer protection laws under each states and
Speaker 5: accompanying that with one claim under federal law under the
Speaker 5: Children Online Privacy Protection Act, which is known as KAPPA.
Speaker 5: And basically the allegation here is that Meta acted in
Speaker 5: an unfair and deceptive manner because it knew that its
Speaker 5: social media service was harmful to teens, but it withheld
Speaker 5: that knowledge and misled users and proceeded to deliver its
Speaker 5: product to teens anyway. So it's seeking damages, civil penalties
Speaker 5: as well as injunctive relief, basically forcing the company to
Speaker 5: change how it serves teams. That's the goal of the lawsuit.
Speaker 1: And so what they're alleging is that Meta designed algorithms.
Speaker 1: It says Meta did not disclose that its algorithms were
Speaker 1: designed to capitalize on young users, dopamine responses, and create
Speaker 1: an addictive cycle of engagement. So the allegation is that
Speaker 1: Meta specifically designed an algorithm for this.
Speaker 5: That's exactly right. So the lawsuit takes aim at a
Speaker 5: number of features that are sort of fundamental to how
Speaker 5: Meta designed its social media platforms, using data about the
Speaker 5: teams to send them content that keeps them scrolling and
Speaker 5: keeps them reading, sending them notifications that keep them coming
Speaker 5: back to the service as soon as they look away
Speaker 5: from it, using the law like system that entices them
Speaker 5: and draws them in and pushes them to put more
Speaker 5: content out there. And the allegation here is that Meta
Speaker 5: knew that all of these features were harmful to teams.
Speaker 5: There's a separate lawsuit actually in this same federal court
Speaker 5: that goes to the design of the product itself and
Speaker 5: whether that violates product liability law or whether Facebook was
Speaker 5: negligent in designing it. Actually, this Friday, that's going to
Speaker 5: be go for emotion to dismiss hearing. This suit's a
Speaker 5: little bit different. It's not about the design itself. It's
Speaker 5: about did Meta lie? Did it mislead users about that?
Speaker 5: And so it takes same It uses these existing consumer
Speaker 5: protection laws about what is unfair and what is deceptive
Speaker 5: to ask did Facebook mislead the public about what it knew?
Speaker 1: And a lot of this is based on the whistleblower
Speaker 1: who released internal Dyes documents in twenty twenty one.
Speaker 5: Yeah, I think that's the real start of this, when
Speaker 5: Francis Hoggin came out with her release of the internal
Speaker 5: documents suggesting that that Facebook knew more about the risk
Speaker 5: to children than it was letting on. And so this
Speaker 5: is really you been playing out ever since that moment. Now,
Speaker 5: Facebook disputes her allegations and says that they're overblown and
Speaker 5: that the evidence isn't clearly as one sided as it
Speaker 5: might seem or as she might suggest. So that's the
Speaker 5: sort of allegation that would be tested in this case
Speaker 5: if it gets past a motion to dismiss.
Speaker 1: Metta said, we share the Attorney General's commitment to providing
Speaker 1: teens with safe, positive experiences online and have already introduced
Speaker 1: over thirty tools to support teens and their families. Do
Speaker 1: you know what kind of tools they're talking about.
Speaker 5: I think these are features like there are settings that
Speaker 5: teens can put on the product to turn off after
Speaker 5: so many minutes on the product. I think there are
Speaker 5: a handful of features like that that they have added.
Speaker 5: You can turn off if you go into the settings,
Speaker 5: you can turn off the data that is used about
Speaker 5: you for ads. I think as a practical matter, these
Speaker 5: features may not be used all that frequently. I know
Speaker 5: my teenager doesn't jump to find those features, and I
Speaker 5: suspect that's true of many many other teams as well.
Speaker 5: So I think the negotiation here before this lawsuit was filed,
Speaker 5: was trying to push the states, likely trying to push
Speaker 5: Meta to find more features and more effective features. And
Speaker 5: I think eventually, if you saw this lawsuit settle, you
Speaker 5: might see a push for even more in that direction,
Speaker 5: more effective features to discourage the use of the network
Speaker 5: so frequently by young users.
Speaker 1: Would they have to actually change the algorithm? Would Meta
Speaker 1: have to change its algorithm?
Speaker 5: That's the question. It starts to become maybe a difficult
Speaker 5: solution because, as we've talked about, this is really focused
Speaker 5: on young users. And is there even a way for
Speaker 5: the company to tailor a fix that changes the algorithm
Speaker 5: just for teens. I don't know. That's probably part of
Speaker 5: the conversation, and it has a technical component that probably
Speaker 5: makes it tricky as well.
Speaker 1: Yeah, because I was listening at the press conference by
Speaker 1: the Washington a G he had two teenagers talk about this,
Speaker 1: and they were so self aware of what was happening,
Speaker 1: and yet they still couldn't get away from it. Listen
Speaker 1: to the things that one of the teenagers tried.
Speaker 4: I've done a lot of different methods to try to
Speaker 4: prevent engagement with Instagram. I've created time limits, I've created
Speaker 4: like an app that you have to open first to
Speaker 4: breathe and then to engage with Instagram. But all of
Speaker 4: these methods eventually fail because I understand that it's up
Speaker 4: to my own discretion and the promise of gaining connection
Speaker 4: with my peers owas seems to be more important.
Speaker 5: Yeah, I mean, I think that's the allegation that it's
Speaker 5: so inviting and so difficult for young users to look away,
Speaker 5: that the companies need to make changes here. Now, it's
Speaker 5: sort of a tricky First Amendment problem here. I mean,
Speaker 5: in the media, there's always been allegations about, you know,
Speaker 5: the next form of media and the harm that it's
Speaker 5: causing to you. So you can go back to the
Speaker 5: nineteen seventies and the Federal Trade Commission was going to
Speaker 5: go after advertising to kids that made them eat onhealthy things,
Speaker 5: and there was a big to do over that, and
Speaker 5: ultimately that sort of fizzled as well. And so you wonder,
Speaker 5: especially in light of the serious First Amendment arguments that
Speaker 5: Meta is going to make to say, look, we have
Speaker 5: the right to organize speech on our platform and to
Speaker 5: make it enticing, to make it, you know, so useful
Speaker 5: and engaging for our users. That's sort of a fundamental
Speaker 5: First Amendment right. What they can't do is mislead about it.
Speaker 5: So that's what if we get right back down to
Speaker 5: the key legal element here is did they mislead? Did
Speaker 5: they know something and then tell the world the opposite.
Speaker 1: Coming up next on the Bloomberg Law Show, I'll continue
Speaker 1: this conversation with Bloomberg Intelligence analyst Matthew Shettenhelm, and we'll
Speaker 1: talk about emotion for summary judgment that's coming up this week.
Speaker 1: In some other lawsuits against social media platforms, I'm June
Speaker 1: Grosso and this is Bloomberg. The Attorney General for Washington State,
Speaker 1: Bob Ferguson, is one of the forty one state ags
Speaker 1: suing Meta platforms, claiming Instagram and Facebook exploit young people
Speaker 1: for profit by building an addictive features that are harming
Speaker 1: their mental health.
Speaker 2: Not only did Meta know the risks these features posed
Speaker 2: to children and teens, the company's own research demonstrate the
Speaker 2: potential for psychological and physical.
Speaker 1: I've been talking to Bloomberg Intelligence analyst Matthew Shettenhelm, and
Speaker 1: our children or teenagers particularly attractive demographic for businesses and advertisers.
Speaker 5: Yeah, I think it's it's important for the company to
Speaker 5: facilitate engagement in young users because young users look at
Speaker 5: they are important a source for advertisers to go after,
Speaker 5: and young users grow up to be older users, and
Speaker 5: so that the more you can engage them at a
Speaker 5: young age, that only makes them, you know, use the
Speaker 5: product more in later years. So I do think it's
Speaker 5: an important demographic now. Metas pushed back on that a
Speaker 5: little bit and said, it really maybe isn't a large
Speaker 5: goal to keep youthful users on the service for you know,
Speaker 5: extended amounts of times. I think that's going to be
Speaker 5: an issue in this case is how much has Meta
Speaker 5: said that that is or is not a goal to
Speaker 5: keep young users spending time the platform.
Speaker 1: The suit also accuses Meta of violating the Children's Online
Speaker 1: Privacy Protection.
Speaker 5: Act right so that you know, I almost read it
Speaker 5: like a throw in. They kind of throw that in
Speaker 5: at the back of the suit maybe to get this
Speaker 5: into federal courts, because all these other things are state
Speaker 5: law claims that you would think maybe would be brought
Speaker 5: state by state in their own courts. By having a
Speaker 5: federal claim in there, then you say, all these other
Speaker 5: state claims are sort of supplemental to it, and so
Speaker 5: one federal court should take the whole thing at one time.
Speaker 5: But the federal claim focuses on the idea that for
Speaker 5: the youngest users, those under thirteen, this federal law says
Speaker 5: you have to have the parents make the decision about
Speaker 5: whether the kids' data can be used for ad targeting
Speaker 5: and have to get their consent and the allegation here
Speaker 5: is that Facebook knew that some of these users were
Speaker 5: under thirteen years old, and it nevertheless let them use
Speaker 5: the system without getting proper parental approval.
Speaker 1: My daughter is well paid the teenage years. So let
Speaker 1: me ask you this. When there are these rules that
Speaker 1: you have to get parental permission, how is that implemented
Speaker 1: when you're online.
Speaker 5: I mean, it's a problem with this law too in
Speaker 5: one other sense as well, that it only applies. Facebook
Speaker 5: only is vulnerable to the law if it knows it
Speaker 5: knowingly allows users under thirteen to go on the site.
Speaker 5: And so that's the first problem that a lot of
Speaker 5: times kids are going on and filling this in. And
Speaker 5: as long as Facebook doesn't know that the kids are
Speaker 5: going on below age thirteen without getting parental approval, then
Speaker 5: it's at least theoretically protected from liability. But otherwise I
Speaker 5: think there's sort of a notification process where once you
Speaker 5: fill in that hey, I'm younger than thirteen years old,
Speaker 5: then there's going to be pop up screens that require
Speaker 5: a second level of approvals and sign off from a parent.
Speaker 5: But if the kid misleads in that first answer to
Speaker 5: the question, that's where it gets kind of tricky.
Speaker 1: When I first heard about this lawsuit, I thought, well,
Speaker 1: there have been other lawsuits like this, right, I keep
Speaker 1: hearing about lawsuits against platforms. What happens to them?
Speaker 5: Yeah, So this is just one piece of a much
Speaker 5: larger sort of legal puzzle I think here on exactly
Speaker 5: this issue. So you know, as I said, there's this
Speaker 5: other lawsuits that is going ahead Friday of this week
Speaker 5: in the Northern District of California that says, look, social
Speaker 5: media itself is a defective product and the companies are
Speaker 5: negligent just by putting it out there exactly for these
Speaker 5: features we talked about, you know, in facilitating engagement of
Speaker 5: youth and the harm it and inflicts on you know,
Speaker 5: mental health for youth across the country. Is that itself
Speaker 5: defective And so that suit's going to play out. As
Speaker 5: we've talked about before, there's this liability shield Section two
Speaker 5: thirty liability shield. Usually Facebook didn't face lawsuit for bad
Speaker 5: stuff on its system because of the liability shield. Increasingly
Speaker 5: courts are reading that real narrowly and so these cases
Speaker 5: can move ahead in a way that they hadn't before.
Speaker 5: The Federal Trade Commission is going after Meta on its
Speaker 5: targeting of youth. So it's really it's a storm here
Speaker 5: on multiple levels. And the real elephant in the room
Speaker 5: is what's Congress going to do about it. Congress hasn't
Speaker 5: been able to pass a law restricting the use of
Speaker 5: data from kids or advertising to kids, and so the
Speaker 5: real question is is Congress going to be able to
Speaker 5: step in with something here? In the meantime, this is
Speaker 5: an effort to use existing old law to try to
Speaker 5: go after these companies, and that's often not easy. So
Speaker 5: I think the companies can win these cases, fight this
Speaker 5: stuff off, although I mean it's not easy. It can
Speaker 5: be difficult. In a lot of cases.
Speaker 1: It seems like meta it's part of the cost of
Speaker 1: doing business. It's been fighting with the Federal Trade Commission for.
Speaker 5: How long exactly right. It did a five million dollars
Speaker 5: settlement on its data issues is part of the Cambridge
Speaker 5: Analytica matter, and that hasn't been the end of the story.
Speaker 5: Now under Lena Khan, the Federal Trade Commission is trying
Speaker 5: to reopen that settlement and ban exactly what we're talking
Speaker 5: about here, the use of data to advertise to kids.
Speaker 5: There was a court hearing I went to in Washington,
Speaker 5: I think just last week on exactly that question, can
Speaker 5: the FTC ban that just by reopening the twenty twenty settlement.
Speaker 5: So this is part of life for a company like
Speaker 5: Meta these days. And these are lawsuits that are difficult,
Speaker 5: but there are lawsuits that you know, you're applying old
Speaker 5: law to new technology, and their lawsuits that often I
Speaker 5: think the companies can win, but it's not always going
Speaker 5: to be easy.
Speaker 1: You know, I'm surprised that Congress hasn't been well. I'm
Speaker 1: not surprised surprised that Congress hasn't been able to do
Speaker 1: something about, you know, the young users, because you know,
Speaker 1: with this lawsuit, you have bipartisan attorneys general from blue
Speaker 1: states and red states and purple states joining together to
Speaker 1: sue Meta. So it's surprising that Congress can't get together.
Speaker 5: That's a great point. And there is a law piece
Speaker 5: of legislation that has advanced in Congress known as the
Speaker 5: Kids Online Safety Act, and it has over forty co
Speaker 5: sponsors in the Senate. Right now, it's just so difficult
Speaker 5: for Congress to agree on anything. I mean, right now
Speaker 5: they're struggling just to agree on who their leaders will be.
Speaker 5: And you know, all of these proposed laws have just
Speaker 5: struggled to advance very far. But you're exactly right. This
Speaker 5: has bipartisan support, and as I said that Kids Online
Speaker 5: Safety Act, you know, it probably has a better chance
Speaker 5: than most pieces of legislation. So you could see some
Speaker 5: movement there if Congress can get attacked together.
Speaker 1: Also, I mean TikTok I always thought was the most
Speaker 1: addictive of these platforms for.
Speaker 5: Kids, right right, I think that's that's right, and it's
Speaker 5: very popular with the kids. Some of the lawsuits have
Speaker 5: targeted TikTok as well, as I said that the one
Speaker 5: that's pending in the Northern District of California that will
Speaker 5: be heard on Friday, that targets TikTok as well as Meta,
Speaker 5: as well as a couple of the other social media networks.
Speaker 5: This new one doesn't target TikTok, but we could see
Speaker 5: follow on actions from the states I think going after
Speaker 5: TikTok as well.
Speaker 1: Well, we'll have to check back with you to find
Speaker 1: out what happens on Friday at that hearing. Thanks so much, Matt.
Speaker 1: That's Matthew Shechttenhelm, Bloomberg intelligence analyst. Coming up next on
Speaker 1: The Bloomberg Law Show. Instagram promoters test the limits of
Speaker 1: a ninety year old securities law. This is Bloomberg.
Speaker 6: Welcome back to real estate investing made simple. Grant Cardone
Speaker 6: here in the car Doon Zone. Every Monday, I said, Steve,
Speaker 6: what I hey you?
Speaker 3: Last month?
Speaker 6: Steve was paid thirty one twenty dollars last month because
Speaker 6: the invested at Cardoncapital dot Com, Cardoncapital dot Com, Cardoncapital
Speaker 6: dot Com.
Speaker 1: This month, the Supreme Court declined to hear a case
Speaker 1: involving a lawsuit against real estate management company cardone Capital
Speaker 1: and its CEO, Grant Cardone, for misleading statements in YouTube
Speaker 1: and Instagram videos. The lawsuit was dismissed on other grounds
Speaker 1: days after the justices refused the case, But the core
Speaker 1: issue remains, what does it mean to sell securities in
Speaker 1: the age of YouTube and Instagram? As venture capital firms
Speaker 1: and others hyping investment projects online are facing lawsuits from
Speaker 1: disgruntled buyers. Joining me is Anne Lipton, a business law
Speaker 1: professor at Tulane University. Start with the real basics, which
Speaker 1: is tell us about the provision in the thirty three
Speaker 1: Securities Act that allows sellers to sue over unregistered securities.
Speaker 7: Okay, so Section twelve is from the nineteen thirty three
Speaker 7: Securities Act, and it basically has two separate provisions. The
Speaker 7: first is that a purchaser of a security that was
Speaker 7: sold unregistered when it should have been registered has a
Speaker 7: right to sue the seller. Basically, it's a right of recision.
Speaker 7: They can give the security back and ask for their
Speaker 7: money back minus any income they've earned on it, so
Speaker 7: they can sue whoever sold it to them if it
Speaker 7: was sold in violation of the registration provisions. And then secondly,
Speaker 7: they can sue anyone who sold it to them or
Speaker 7: who solicited the purchase if the prospectus or sales documents
Speaker 7: contained false statements. Now, sometimes there's a bit of a
Speaker 7: debate about what counts as a prospectus, but what it
Speaker 7: comes down to is that this is sometimes a more
Speaker 7: attractive option than say, more traditional ways of suing for
Speaker 7: false statements, like Section ten B, which is the anti
Speaker 7: fraud statute, because if you sue for false statements in
Speaker 7: connection with essentially these unregistered ccurity sales under section twelve,
Speaker 7: you don't have to a show that you relied on
Speaker 7: the false statement, and you don't have to show that
Speaker 7: there was any intent to make a false statement, and so.
Speaker 1: How did the Supreme Court define a seller in nineteen eighty.
Speaker 7: Eight, So in the case of Pitter versus Doll, there
Speaker 7: was a question of who counts as a statutory seller.
Speaker 7: In other words, Section twelve speaks of people who sell securities.
Speaker 7: So the question was, do you have to be actually
Speaker 7: the person who transfer the title me to you or
Speaker 7: could it be other people who are somewhat involved with
Speaker 7: the sale. And the court first said it has to
Speaker 7: be either a direct transfer of title or it has
Speaker 7: to be someone who solicited the purchase. But they drew
Speaker 7: a distinction between someone who is somehow involved and had
Speaker 7: something to do with the buyer actively going out and
Speaker 7: purchasing the security, and instead they said they have to
Speaker 7: have actually solicited and had some kind of relationship with
Speaker 7: the buyer. They rejected a test that would be somehow
Speaker 7: like people who are just substantially participate in the sale.
Speaker 7: So that was interpreted by courts to mean that you
Speaker 7: could only be liable under section twelve if you literally
Speaker 7: transferred title it was your security and you sold it
Speaker 7: to someone else, or if you had some kind of
Speaker 7: direct contact with a relationship with the buyer so that
Speaker 7: you induced the purchase that way.
Speaker 1: So in our world of social media, where venture capital
Speaker 1: firms and others are hyping investment projects online, are courts
Speaker 1: having a difficult time determining whether they're sellers or not.
Speaker 7: Yeah. So the issue here is that after Pinter versus Doll,
Speaker 7: there were a bunch of cases involving what were basically
Speaker 7: registered offerings. They were registered offerings, they were IPOs where
Speaker 7: people sued for false statements in the IPO documents. Now
Speaker 7: there's a cause of action specifically for that false statements
Speaker 7: in a registration statement under section eleven, and they would
Speaker 7: also sue under section twelve because Section twelve has liability
Speaker 7: both for unregistered offerings, which these weren't, or for false
Speaker 7: statements and a perspective, and courts rejected the Section twelve
Speaker 7: liability looking at Pinter in a lot of cases where
Speaker 7: there was no direct contact with the buyer. So for example,
Speaker 7: issuing companies, it was their security, but they sold in
Speaker 7: a firm commitment underwriting, meaning the underwriters bought the securities
Speaker 7: from the issuer. The underwriters then sold to the public.
Speaker 7: The producer would try to sue the issuer under section
Speaker 7: twelve because the issuer's name is all over the perspectives.
Speaker 7: It's like their company, it's their securities being sold, and
Speaker 7: the courts would say the issuer did not have enough
Speaker 7: direct involvement with this particular sale to this buyer to
Speaker 7: justify imposing Section twelve viability. Now, you could still have
Speaker 7: other forms of liability because these were registered offerings, but
Speaker 7: you couldn't have liability under section twelve. So the court
Speaker 7: reading pincher vicious now very narrowly to mean you have
Speaker 7: to have had some kind of contact with a relationship
Speaker 7: with the buyer. So now we fast forward to crypto,
Speaker 7: and the problem is there is an alternative scheme because crypto,
Speaker 7: assuming it's a security, which is a whole everything, but
Speaker 7: let's assume is a security. If crypto is a security,
Speaker 7: it's not registered. So the liability regime that was available
Speaker 7: in those IPO cases for registered offerings is not available
Speaker 7: to these shareholders. So for these shareholders, Section twelve is
Speaker 7: sort of the main potential avenue of liability other than
Speaker 7: the anti fraud laws, which are hard. There's much harder.
Speaker 7: So they're suing under section twelve because that's it. And
Speaker 7: what we've seen now is too Appellate Court said, direct contact,
Speaker 7: we never said that. We are you talking about known
Speaker 7: as it's talent is a solicitation. As long as you
Speaker 7: make these public statements in advertising urging people to buy,
Speaker 7: that's a solicitation, even if there's no personal relationship. Meanwhile,
Speaker 7: there are at least a couple of other decisions that say, no,
Speaker 7: we're sticking to the old interpretations of pinter that there
Speaker 7: have to be this kind of direct relationship. And then
Speaker 7: you have courts that are sort of like saying, like
Speaker 7: in a case against Coinbase, that Coinbase with air drops
Speaker 7: and materials about particular securities, that wasn't a solicitation. But
Speaker 7: it's not exactly clear why, you know, the court just
Speaker 7: says that's not enough. So we don't know exactly what's
Speaker 7: enough or what exactly the regime is going to be.
Speaker 1: The Supreme Court decided not to take a case involving
Speaker 1: cardone Capital. Tell us a little about the issues there, Well,
Speaker 1: that was the.
Speaker 7: Case that was Actually it wasn't a registered offering. I
Speaker 7: believe it was under Regulation A. So Regulation A is
Speaker 7: an exemption from a full on registered offerings, but it
Speaker 7: does require some degree of filing and disclosure. With the SEC,
Speaker 7: so it wasn't an unregistered offering. But because it's not
Speaker 7: registered offerings, the standard protections available in registered offerings are
Speaker 7: not available to purchasers. Instead, the only liability available would be,
Speaker 7: you know, just straight up fraud, which is again very
Speaker 7: hard to prove, or Section twelve liability. That's what's available.
Speaker 7: And so this real estate company, they use social media
Speaker 7: to advertise the offering that was filed with the SEC.
Speaker 7: They had documents with the SEC and so forth, and
Speaker 7: shareholders claimed that these advertisements were solicitations. In the Ninth
Speaker 7: Circuit agreed and repudiated. I mean, you know, some of
Speaker 7: the case law that had held there must be direct
Speaker 7: contact hadn't come out of the Ninth Circuit, so at
Speaker 7: very least it was disagreeing with you know, the other
Speaker 7: courts that had imposed something like a direct contact requirement.
Speaker 7: But the Supreme Court denied sort you know, I mean,
Speaker 7: there are any number of reasons why they could have
Speaker 7: denied CIRT. But one possibility is that the social media
Speaker 7: cases are new. They're you know, looking to this old
Speaker 7: precedent that was generated under IPO situations, and you know,
Speaker 7: it may take some time to work through the court
Speaker 7: you know, if you ask.
Speaker 1: An average person, it doesn't seem like the difficult question.
Speaker 1: They're online, they're soliciting. Yeah, they're selling. What makes you difficult?
Speaker 7: Well, because the interesting thing is that the word solicit
Speaker 7: it doesn't actually appear in the statute. Nothing in the
Speaker 7: statutes as imposing liability for solicitation. What the statute says
Speaker 7: is imposing liability for selling. The Supreme Court's interpretation of
Speaker 7: selling in Printer versus Doll, this case from nineteen eighty
Speaker 7: eight is the one that imposed this concept of solicitation
Speaker 7: with this very specific kind of definition. And to be honest,
Speaker 7: Printer doesn't seem to really understand how security sales work.
Speaker 7: There are parts of it that display a kind of
Speaker 7: lack of understanding. For instance, there's a line in it
Speaker 7: that says you can't have liability for a seller seller
Speaker 7: that if you sell to somebody and that person sells
Speaker 7: to someone else, the original seller isn't going to be liable.
Speaker 7: But that's a firm commitment underwriting, and courts are struggling
Speaker 7: with that. The sec has been struggling with that ever
Speaker 7: since Pinter versus Doll held it. So, you know, this
Speaker 7: concept of solicitation and exactly how we're defining it is
Speaker 7: not in the statute. It comes from the Supreme Court
Speaker 7: case launch. So now we're all trying to figure out
Speaker 7: what the Supreme Court meant and how you translate a
Speaker 7: case in nineteen eighty eight to today.
Speaker 1: So the Ninth and the Eleventh Circuits are they in
Speaker 1: sync ruling?
Speaker 7: Yeah, it's they seem to be following the same path
Speaker 7: that you know, at least, at the very least, these
Speaker 7: sort of widespread social media campaigns are sufficient. But what's
Speaker 7: really unclear is like what would be like, I mean, like,
Speaker 7: once you take away the requirement of direct contact, which
Speaker 7: is how courts seem to be reading it before, then
Speaker 7: there's the question of well, how much urging is enough?
Speaker 7: And that was exactly what happened with coinbase, where you know,
Speaker 7: Coinbase technically it did have direct contact. It was talking
Speaker 7: to its customers and it you know, it does whatever
Speaker 7: it does to say, you know, here's an airdrop of
Speaker 7: a new security or whatever, and a court said, well,
Speaker 7: that's just not enough. So now we have all kinds
Speaker 7: of questions like if social media is permissible, if you
Speaker 7: don't have the restriction of direct contact, then how much
Speaker 7: urging is enough to qualify solicitation, given that in Pinter,
Speaker 7: the Supreme Court's concern was, we don't want just substantial
Speaker 7: participation to be enough. And the reason we don't was
Speaker 7: because we want people to have certainty as to when
Speaker 7: they are potentially liable or not. It's important that we
Speaker 7: have certainty. Direct contact at least, that's that's a rule
Speaker 7: be the best rule. It may not be the most
Speaker 7: functional rule, but we know what it means. We know
Speaker 7: when we see in. Now we're in this space where
Speaker 7: it's not clear what's going to be enough and.
Speaker 1: Which circuits have a different take on this than the
Speaker 1: ninth and the eleventh.
Speaker 7: There are several circuits that implied anyway, especially in these
Speaker 7: IPO cases, that you needed something like direct contact. The
Speaker 7: third circuit, the first circuit, the fifth circuit. I know,
Speaker 7: there's definitely a district Core case involving crypto that followed
Speaker 7: in the second circuit that followed these cases to say no,
Speaker 7: you need something like direct contact, although sometimes the phrasing
Speaker 7: they use is sort of unclear because they say direct
Speaker 7: contact or active solicitation, and it's not exactly clear what
Speaker 7: they mean by active.
Speaker 1: Why don't these quote sellers want to register just to
Speaker 1: be safe.
Speaker 7: So first of all, the crypto people all say that
Speaker 7: these aren't securities anyway. But the whole point is that
Speaker 7: like registration, if you register them that there's a terrific
Speaker 7: amount of disclosure you have to make and there's very
Speaker 7: strict liability if those disclosures are false. That's why courts
Speaker 7: could get away for so long saying well, we won't
Speaker 7: have Section twelve liability for these IPO situations because there
Speaker 7: were alternatives. There's some very strict liability for false statements.
Speaker 7: If you register, you have to do a terrific amount
Speaker 7: of disclosure. It's very expensive and you're risking this liability.
Speaker 7: And a lot of crypto people say that the registration requirements,
Speaker 7: like the disclosure requirements that attach, are simply not suitable
Speaker 7: for crypto, like they ask for things that don't make
Speaker 7: sense in the crypto context, like principles of an organization
Speaker 7: when it's a decentralized autonomous organization, or addresses when there
Speaker 7: is no address. So the crypto people will say that
Speaker 7: not only is disclosure expensive and opens us up to
Speaker 7: all this liability, but the SEC hasn't updated the registration
Speaker 7: requirements to really make sense in a crypto world.
Speaker 1: So then will it be up to the Supreme Court
Speaker 1: to clarify this so that there is clearer guidance?
Speaker 7: Very possibly. I mean, you know, there's a lot that
Speaker 7: could happen in between. And then, I mean, first of all,
Speaker 7: if all the circuits come to settle on something, I mean,
Speaker 7: the Supreme Court doesn't have the kind of passion for
Speaker 7: securities cases that say I do. So if the circuits
Speaker 7: coalesce around a principle that's coherent, then the Supreme Court
Speaker 7: may not step in at all. And you know, we
Speaker 7: can all argue about it. But you know, I'm not
Speaker 7: convinced that crypto is, you know, the wave of the future.
Speaker 7: So at some point, if crypto has becomes less popular,
Speaker 7: then we may just see less of these cases. I mean,
Speaker 7: Regulation A was how this came up in the Ninth Circuit,
Speaker 7: and that will still exist because that's sort of a
Speaker 7: formal disclosure space for securities that you don't want to
Speaker 7: do full registration for. But reggae isn't really that popular
Speaker 7: to begin with. So I mean, if crypto becomes less
Speaker 7: of a thing, it may simply be that this kind
Speaker 7: of settles down by itself.
Speaker 1: Well, it's been great to talk to you, Anne. I
Speaker 1: love your enthusiasm about securities law. That's Anne Lipton, a
Speaker 1: business professor at Tulane University. And that's it for this
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