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Speaker 1: Bloomberg Law With June Grosso from Bloomberg Radio.
Speaker 2: Welcome to a special best of edition of the Bloomberg
Speaker 2: Law Show. Ahead in this hour, Meta is being sued
Speaker 2: by forty two attorneys general for addictive features that harm
Speaker 2: the mental health of young people and Instagram promoters test
Speaker 2: the limits of a ninety year old securities law.
Speaker 3: They were announcing a federal lawsuit against Meta. Meta, of course,
Speaker 3: is the parent company of Instagram and Facebook, for knowingly
Speaker 3: harming the mental health of young social media users. In short,
Speaker 3: Meta intentionally designed its social media platform to be more
Speaker 3: addictive to kids and young people.
Speaker 2: Meta Platforms is being sued by forty one states who
Speaker 2: claimed that social media platforms Instagram and Facebook exploit young
Speaker 2: people for profit by building an addictive features that are
Speaker 2: harming their mental health. At a press conference of the
Speaker 2: Attorney General of Washington State, Bob Ferguson, two teenagers described
Speaker 2: their struggles coping with social media sites like Instagram.
Speaker 4: The worst part was these pictures and videos were never ending.
Speaker 4: The addictive algorithm and the constant flood of new content
Speaker 4: kept me glued to my phone, and before I knew it,
Speaker 4: I began to hate myself and the way I looked.
Speaker 4: This all has happened before I turned thirteen, as.
Speaker 5: I would go on my phone and tending to do
Speaker 5: other things, and then instinctively start opening up Instagram, opening
Speaker 5: up different social media platforms without even meanings too, and
Speaker 5: then getting stuck in the cycle of scrolling seeing other
Speaker 5: people's lives and interactions.
Speaker 2: Ferguson said Meta knowingly misled users and hooked youngsters with
Speaker 2: psychologically manipulative product features to keep them on the sites.
Speaker 3: These other features are intentionally designed to incessantly monopolize the
Speaker 3: time and attention of kids using Instagram and Facebook. They
Speaker 3: tap into their so called fear of missing out, discouraging
Speaker 3: them from leaving the apps once they are logged on.
Speaker 3: Meta is aware of the addictive nature of these features
Speaker 3: for young people and the risks that they pose. The
Speaker 3: original developer of the infinite scroll concept Liken the feature too,
Speaker 3: and I'm quoting now behavioral cocaine.
Speaker 2: Thirty three states are filing a joint lawsuit in federal
Speaker 2: court in California, while attorneys general for DC and eight
Speaker 2: other states are filing separate complaints in federal, state or
Speaker 2: local courts. Joining me is Bloomberg Intelligence analyst Matthew Shettenhelm.
Speaker 2: Matt tell us about the federal lawsuit.
Speaker 6: So yesterday over thirty states filed in federal court in California,
Speaker 6: basically using their consumer protection laws under each state and
Speaker 6: accompanying that with one claim under federal law under the
Speaker 6: Children Online Privacy Protection Act, which is known as KAPPA.
Speaker 6: And basically the allegation here is that Meta acted in
Speaker 6: an unfair and deceptive manner because it knew that its
Speaker 6: social media service was harmful to teens, but it withheld
Speaker 6: knowledge and misled users and proceeded to deliver its product
Speaker 6: to teens anyway. So it's seeking damages, civil penalties as
Speaker 6: well as injunctive relief, basically forcing the company to change
Speaker 6: how it serves teams. That's the goal of the lawsuit.
Speaker 2: And so what they're alleging is that Meta did not
Speaker 2: disclose that its algorithms were designed to capitalize on young users,
Speaker 2: dopamine responses, and create an addictive cycle of engagement. So
Speaker 2: the allegation is that Meta specifically designed an algorithm for this.
Speaker 6: That's exactly right. So the lawsuit takes aim at a
Speaker 6: number of features that are sort of fundamental to how
Speaker 6: Meta designed its social media platforms, using data about the
Speaker 6: teens to send them content that keeps them scrolling and
Speaker 6: keeps them reading, sending them notifications that keep them coming
Speaker 6: back to the service as soon as they look away
Speaker 6: from it, using the like system that entices them and
Speaker 6: draws them in and pushes them to put more content
Speaker 6: out there. And the allegation here is that Meta knew
Speaker 6: that all of these features were harmful to teams. There's
Speaker 6: a separate lawsuit actually in this same federal court that
Speaker 6: goes to the design of the product itself and whether
Speaker 6: that violates product liability law. Or whether Facebook was negligent
Speaker 6: in designing it. This suit's a little bit different. It's
Speaker 6: not about the design itself. It's about did Meta lie?
Speaker 6: Did it mislead users about that? And so it takes
Speaker 6: same It uses these existing consumer protection laws about what
Speaker 6: is unfair and what is deceptive to ask did Facebook
Speaker 6: mislead the public about what it knew?
Speaker 2: And a lot of this is based on the whistleblower
Speaker 2: who released internal documents in twenty twenty one.
Speaker 6: Yeah, I think that's the real start of this, when
Speaker 6: Francis Hoggin came out with her release of the internal documents,
Speaker 6: suggesting that that Facebook knew more about the risk to
Speaker 6: children than it was letting on. And so this is
Speaker 6: really you been playing out ever since that moment. Now,
Speaker 6: Facebook disputes her allegations and says that they're overblown and
Speaker 6: that the evidence isn't clearly as one sided as it
Speaker 6: might seem or as she might suggest. So that's the
Speaker 6: sort of allegation that would be tested in this case
Speaker 6: if it gets past a motion to dismiss.
Speaker 2: Meta said, we share the Attorney General's commitment to providing
Speaker 2: teens with safe, positive experiences online and have already introduced
Speaker 2: over thirty tools to support teens and their families. Do
Speaker 2: you know what kind of tools they're talking about.
Speaker 6: I think these are features like there are settings that
Speaker 6: teens can put on the product to turn off after
Speaker 6: so many minutes on the product. I think there are
Speaker 6: a handful of features like that that they have added.
Speaker 6: You can turn off if you go into the settings,
Speaker 6: you can turn off the data that is used about
Speaker 6: you for ads. I think as a practical matter, these
Speaker 6: features may not be used all that frequently. I know
Speaker 6: my teenager doesn't jump to find those features, and I
Speaker 6: suspect that's true of many many other teams as well.
Speaker 6: So I think the negotiation here before this lawsuit was filed,
Speaker 6: was trying to push the states likely trying to push
Speaker 6: Meta to find more features and more effective features. And
Speaker 6: I think eventually, if you saw this lawsuit settle, you
Speaker 6: might see a push for even more in that direction,
Speaker 6: more effective features to discourage the use of the network
Speaker 6: so frequently by young users.
Speaker 2: Would they have to actually change the algorithm? Would Meta
Speaker 2: have to change its algorithm?
Speaker 6: That's the question. It starts to become maybe a difficult solution,
Speaker 6: And because as we've talked about, this is really focused
Speaker 6: on young users, and is there even a way for
Speaker 6: the company to tailor a fix that changes the algorithm
Speaker 6: just for teens. I don't know. That's probably part of
Speaker 6: the conversation, and it has a technical component that probably
Speaker 6: makes it tricky as well.
Speaker 2: Yeah, because I was listening at the press conference by
Speaker 2: the Washington a G he had two teenagers talk about this,
Speaker 2: and they were so self aware of what was happening,
Speaker 2: and yet they still couldn't get away from it. Listen
Speaker 2: to the things that one of the teenagers tried.
Speaker 5: I've done a lot of different methods to try to
Speaker 5: prevent engagement with Instagram. I've created time limits, I've created
Speaker 5: like an app that you have to open first to
Speaker 5: breathe and then to engage with Instagram. But all of
Speaker 5: these methods eventually fail because I understand that it's up
Speaker 5: to my own discretion and the promise of gaining connection
Speaker 5: with my peers ohas seems to be more important.
Speaker 6: Yeah, I mean, I think that's the allegation that it's
Speaker 6: so inviting and so difficult for young users to look away,
Speaker 6: that the companies need to make changes here. Now it's
Speaker 6: sort of a tricky First Amendment problem here, and we
Speaker 6: in the media. There's always been allegations about the you know,
Speaker 6: the next form of media and the harm that it's
Speaker 6: causing to you. So you can go back to the
Speaker 6: nineteen seventies and the Federal Trade Commission was going to
Speaker 6: go after advertising to kids that made them eat onhealthy things,
Speaker 6: and there was a big to do over that, and
Speaker 6: ultimately that sort of fizzled as well. And so you wonder,
Speaker 6: especially in light of the serious First Amendment arguments that
Speaker 6: Meta is going to make to say, look, we have
Speaker 6: the right to organize speech on our platform and to
Speaker 6: make it enticing, to make it you know, useful and
Speaker 6: gauging for our users. That's sort of a fundamental First
Speaker 6: Amendment right. What they can't do is mislead about it.
Speaker 6: So that's what if we get right back down to
Speaker 6: the key legal element here is did they mislead? Did
Speaker 6: they know something and then tell the world the opposite.
Speaker 2: Coming up next on the Bloomberg Law Show, I'll continue
Speaker 2: this conversation with Bloomberg intelligence analyst Matthew Shettenhelm, and we'll
Speaker 2: talk about emotion for some rejudgment that's coming up this
Speaker 2: week in some other lawsuits against social media platforms, remember
Speaker 2: you can always get the latest legal news by listening
Speaker 2: to our Bloomberg Law podcast wherever you get your favorite podcasts.
Speaker 2: I'm June Grosso and this is Bloomberg.
Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio.
Speaker 2: You're listening to a special best of edition of the
Speaker 2: Bloomberg Law Show. Bob Ferguson is one of the forty
Speaker 2: one sts suing Meta platforms, claiming Instagram and Facebook exploit
Speaker 2: young people for profit by building an addictive features that
Speaker 2: are harming their mental health.
Speaker 3: Not only did Meta know the risks these features pose
Speaker 3: to children and teens, the company's own research demonstrate the
Speaker 3: potential for psychological and physical harms. These harms include higher
Speaker 3: rates of depression, anxiety, and attention deficit disorders, eating disorders,
Speaker 3: and low self esteem, especially for adolescent girls, disruptions asleep
Speaker 3: and other activities essential for kids health. The stakes here
Speaker 3: are high. According to the US Surgeon General. Recent research
Speaker 3: shows that adolescents who spend more than three hours a
Speaker 3: day on social media face double the risk of poor
Speaker 3: mental health outcomes such as depression or anxiety.
Speaker 2: I've been talking to Bloomberg Intelligence analyst Matthew Shettenhelm, and
Speaker 2: are children or teenagers particularly attractive demographic for businesses and advertisers?
Speaker 6: Yeah, I think it's it's important for the company to
Speaker 6: facilitate engagement in young users because young users look at
Speaker 6: they are important a source for advertisers to go after,
Speaker 6: and young users grow up to be older users, and
Speaker 6: so that the more you can engage them at a
Speaker 6: young age, that only makes them, you know, use the
Speaker 6: product more in later years. So I do think it's
Speaker 6: an important demographic. Now Meta is pushed back on that
Speaker 6: a little bit and said it really maybe isn't a
Speaker 6: large goal to keep youthful users on the service for
Speaker 6: you know, extended amounts of times. I think that's going
Speaker 6: to be an issue in this case is how much
Speaker 6: has Meta said that that is or is not a
Speaker 6: goal to keep young users spending time on the platform.
Speaker 2: The suit also accuses Meta of violating the Children's Online
Speaker 2: Privacy Protection.
Speaker 6: Act, Right, so that's you know, I almost read it
Speaker 6: like a throw in. They kind of throw that in
Speaker 6: at the back of the suit maybe to get this
Speaker 6: into federal courts, because all these other things are state
Speaker 6: law claims that you would think maybe would be brought
Speaker 6: state by state in their own courts. By having a
Speaker 6: federal claim in there, then you say all these other
Speaker 6: state claims are sort of supplemental to it, and so
Speaker 6: one federal court should take the whole thing at one time.
Speaker 6: But the federal claim focuses on the idea that for
Speaker 6: the youngest users, those under thirteen, this federal law says
Speaker 6: you have to have the parents make the decision about
Speaker 6: whether the kids' data can be used for ad targeting,
Speaker 6: and have to get their consent. And the allegation here
Speaker 6: is that Facebook knew that some of these users were
Speaker 6: under thirteen years old, and it nevertheless let them use
Speaker 6: the system without getting proper parental approval.
Speaker 2: My daughter is well past the teenage years. So let
Speaker 2: me ask you this. When there are these rules that
Speaker 2: you have to get parental permission, how is that implemented
Speaker 2: when you're online.
Speaker 6: I mean, it's a problem with this law too in
Speaker 6: one other sense as well, that it only applies. Facebook
Speaker 6: only is vulnerable to the law if it knows it
Speaker 6: knowingly allows users under thirteen to go on the site.
Speaker 6: And so that's the first problem that a lot of
Speaker 6: times kids are going on and filling this in. And
Speaker 6: as long as Facebook doesn't know that the kids are
Speaker 6: going on below age thirteen without getting prontal approval, then
Speaker 6: it's at least theoretically protected from liability. But otherwise, I
Speaker 6: think there's sort of a notification process where once you
Speaker 6: fill in that hey, I'm younger than thirteen years old,
Speaker 6: then there's going to be pop up screens that require
Speaker 6: a second level of approvals and sign off from a parent.
Speaker 6: But if the kid misleads in that first answer to
Speaker 6: the question, that's where it gets kind of tricky.
Speaker 2: When I first heard about this lawsuit, I thought, well,
Speaker 2: there have been other lawsuits like this, right, I keep
Speaker 2: hearing about lawsuits against platforms. What happens to them?
Speaker 6: Yeah, so this is just one piece of a much
Speaker 6: larger sort of legal puzzle I think here on exactly
Speaker 6: this issue. So you know, as I said, there's this
Speaker 6: other lawsuit in the Northern District of California that says, look,
Speaker 6: social media itself is a defective product and the companies
Speaker 6: are negligent just by putting it out there exactly for
Speaker 6: these features we talked about, you know, in facilitating engagement
Speaker 6: of youth and the harm it inflicts on you know,
Speaker 6: mental health for youth. Across the country is that itself defective,
Speaker 6: and so that suit's going to play out. As we've
Speaker 6: talked about before, there's this liability shield Section two thirty
Speaker 6: liability shield. Usually Facebook didn't face lawsuits, you know, for
Speaker 6: bad stuff on its system because the liability shield. Increasingly,
Speaker 6: courts are reading that real narrowly, and so these cases
Speaker 6: can move ahead in a way that they hadn't been for.
Speaker 6: The Federal Trade Commission is going after Meta on its
Speaker 6: targeting of youth. So it's really it's a storm here
Speaker 6: on multiple levels. And the real elephant in the room
Speaker 6: is what's Congress going to do about it. Congress hasn't
Speaker 6: been able to pass a law restricting the use of
Speaker 6: data from kids or advertising to kids, and so the
Speaker 6: real question is is Congress going to be able to
Speaker 6: step in with something here. In the meantime, this is
Speaker 6: an effort to use existing old law to try to
Speaker 6: go after these companies, and that's often not easy. So
Speaker 6: I think the companies can win these cases fight this
Speaker 6: stuff off, although I mean it's not easy. It can
Speaker 6: be difficult. In a lot of cases.
Speaker 2: It seems like Meta it's part of the cost of
Speaker 2: doing business. It's been fighting with the Federal Trade Commission
Speaker 2: for how long?
Speaker 6: Exactly right, it did a five million dollars settlement on
Speaker 6: its data issues is part of the Cambridge Analytica matter,
Speaker 6: and that hasn't been the end of the story. Now
Speaker 6: under a con the Federal Trade Commission is trying to
Speaker 6: reopen that settlement and ban exactly what we're talking about here,
Speaker 6: the use of data to advertise to kids. There was
Speaker 6: a court hearing I went to in Washington on exactly
Speaker 6: that question. Can the FTC ban that just by reopening
Speaker 6: the twenty twenty settlement. So this is part of life
Speaker 6: for a company like Meta these days. And these are
Speaker 6: lawsuits that are difficult. But there are lawsuits that you know,
Speaker 6: you're applying old law to new technology, and there are
Speaker 6: lawsuits that often I think the companies can win, but
Speaker 6: it's not always going to be easy.
Speaker 2: You know, I'm surprised that Congress hasn't been well, I'm
Speaker 2: not surprised surprised that Congress hasn't been able to do
Speaker 2: something about, you know, the young users, because you know,
Speaker 2: with this lawsuit, you have bipartisan attorneys general from blue
Speaker 2: states and red states and purple states joining together to
Speaker 2: sue Meta so it's surprising that Congress can't get together.
Speaker 6: That's a great point. And there is a law piece
Speaker 6: of ledge that has advanced in Congress known as the
Speaker 6: Kids Online Safety Act, and it has over forty co
Speaker 6: sponsors in the Senate. Right now, it's just so difficult
Speaker 6: for Congress to agree on anything, and you know, all
Speaker 6: of these proposed laws have just struggled to advance very far.
Speaker 6: But you're exactly right. This has bipartisan support, and as
Speaker 6: I said, that Kids Online Safety Act, you know, it
Speaker 6: probably has a better chance than most pieces of legislation.
Speaker 6: So you could see some movement there if Congress can
Speaker 6: get attacked together.
Speaker 2: Also, I mean TikTok I always thought was the most
Speaker 2: addictive of these platforms for kids.
Speaker 6: Right right, I think that's right, and it's very popular
Speaker 6: with the kids. Some of the lawsuits have targeted TikTok
Speaker 6: as well. As I said that the one that's pending
Speaker 6: in the Northern District of California that will be heard
Speaker 6: on Friday, that targets TikTok as well as Meta as
Speaker 6: well as a couple of the other social media networks.
Speaker 6: This new one doesn't target TikTok, but we could see
Speaker 6: follow on actions from the States. I think going after
Speaker 6: TikTok as well.
Speaker 2: Well, we'll have to check back with you to find
Speaker 2: out what happens. Thanks so much, Matt. That's Matthew Shettenhelm,
Speaker 2: Bloomberg Intelligence analyst. Coming up next on The Bloomberg Law Show.
Speaker 2: Instagram promoters test the limits of a ninety year old
Speaker 2: securities law and attorneys looking for legal research. Whether you're
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Speaker 2: Law dot com. This is Bloomberg.
Speaker 1: This is Bloomberg Law with June Brusso from Bloomberg Radio.
Speaker 2: You're listening to a special best of edition of The
Speaker 2: Bloomberg Law Show.
Speaker 1: Real Estate Investing Made Simple.
Speaker 2: Grant cardone here in the cardon zone.
Speaker 7: Every Monday, I said Steve, what I pay you last month?
Speaker 1: Steve was paid thirty one twenty dollars last month.
Speaker 4: Because he invested at Cardoncapital dot Com, Cardoncapitol dot Com,
Speaker 4: Cardoncapital dot Com.
Speaker 2: In October, the Supreme Court declined to hear a case
Speaker 2: involving a lawsuit against real estate management company Cardone Capital
Speaker 2: and its CEO, Grant Cardone, for misleading statements in YouTube
Speaker 2: and Instagram videos. The lawsuit was dismissed on other grounds
Speaker 2: days after the justices refused the case, But the core
Speaker 2: issue remains, what does it mean to sell securities in
Speaker 2: the age of YouTube and Instagram? As venture capital firms
Speaker 2: and ow there is hyping investment projects online are facing
Speaker 2: lawsuits from disgruntled buyers. Joining me is Anne Lipton, a
Speaker 2: business law professor at Tulane University. Start with the real basics,
Speaker 2: which is, tell us about the provision in the thirty
Speaker 2: three Securities Act.
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 rescision.
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 a false statements. Now, sometimes there's a bit of
Speaker 7: a debate about what counts as a perspectus, but what
Speaker 7: it comes down to is that this is sometimes a
Speaker 7: more attractive option than say, more traditional ways of suing
Speaker 7: for false statements, like Section ten B, which is the
Speaker 7: anti fraud statute, because if you sue for false statements
Speaker 7: in connection with essentially these unregistered security sales under section twelve,
Speaker 7: you don't have to show that you relied on the
Speaker 7: false statement, and you don't have to show that there
Speaker 7: was any intent to make a false statement.
Speaker 2: And so how did the Supreme Court define a seller
Speaker 2: in nineteen eighty eight, So in.
Speaker 7: The case of Pitter versus Doll, there was a question
Speaker 7: of who counts as a statutory seller. In other words,
Speaker 7: Section twelve speaks of people who sell securities. So the
Speaker 7: question was, do you have to be actually the person
Speaker 7: who transfer the title me to you, or could it
Speaker 7: be other people who are somewhat involved.
Speaker 6: With the sale.
Speaker 7: And the court first said it has to be either
Speaker 7: a direct transfer of title or it has to be
Speaker 7: someone who solicited the purchase. But they drew a distinction
Speaker 7: between someone who is somehow involved and had something to
Speaker 7: do with the buyer actively going out and purchasing the security,
Speaker 7: and instead they said they have to have actually solicited
Speaker 7: and had some kind of relationship with the buyer. They
Speaker 7: rejected a test that would be somehow like people who
Speaker 7: are just substantially participate in the sale. So that was
Speaker 7: interpreted by courts to mean that you could only be
Speaker 7: liable Intersection twelve if you literally transferred title it was
Speaker 7: your security and you sold it to someone else, or
Speaker 7: if you had some kind of direct contact with a
Speaker 7: relationship with the buyer so that you induced the purchase
Speaker 7: that way.
Speaker 2: So in our world of social media, where venture capital
Speaker 2: firms and others are hyping investment projects online, are courts
Speaker 2: 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 perspectives 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 securities, 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 purduser 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 penttrovicious now very narrowly to mean you have to
Speaker 7: have had some kind of contact with a relationship with
Speaker 7: the buyer. So now we fast forward to crypto, and
Speaker 7: the problem is there isn't an alternative scheme because crypto,
Speaker 7: assuming it's a security, which is a wholes 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 to appellate court said direct contact.
Speaker 7: We never said that. What are you talking about, known
Speaker 7: as it's talent is a solicitation And as long as
Speaker 7: you 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
Speaker 7: say no, we're sticking to the old interpretations of pinter
Speaker 7: that there have to be this kind of direct relationship.
Speaker 7: And then you have courts that are sort of like saying,
Speaker 7: like in a case against Coinbase, that coinbase with air
Speaker 7: drops and materials about particular securities. That wasn't a solicitation.
Speaker 7: But it's not exactly clear why, you know, the court
Speaker 7: just says that's not enough. So we don't know exactly
Speaker 7: what's enough or what exactly the regime is going to be.
Speaker 2: The Supreme Court decided not to take a case involving
Speaker 2: cardone Capital. Tell us a little about the issues there, Well,
Speaker 2: 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 registered 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 courts.
Speaker 2: You know, if you ask an average person, it doesn't
Speaker 2: seem like the difficult question. They're online, they're soliciting. Yeah,
Speaker 2: they're selling.
Speaker 7: What makes more difficult, Well, because the interesting thing is
Speaker 7: that the word solicit it doesn't actually appear in the statute.
Speaker 7: Nothing in the statute says imposing liability for solicitation. Well,
Speaker 7: the statute says is imposing liability for selling. The Supreme
Speaker 7: Court's interpretation of selling in Printer versus Doll, this case
Speaker 7: from nineteen eighty eight is the one that imposed this
Speaker 7: concept of solicitation with this very specific kind of definition.
Speaker 7: And to be honest, Printer doesn't seem to really understand
Speaker 7: how security sales works. There are parts of it that
Speaker 7: display a kind of lack of understanding. For instance, there's
Speaker 7: a line in it that says you can't have liability
Speaker 7: for a sellers seller that if you sell to somebody
Speaker 7: and that person sells to someone else, the original seller
Speaker 7: isn't going.
Speaker 6: To be liable.
Speaker 7: But that's a firm commitment underwriting and ports of struggling
Speaker 7: with that the secs and ruggling with that ever since
Speaker 7: Piner versus all held it. So you know, this concept
Speaker 7: of solicitation exactly how we're defining it is not in
Speaker 7: the statute. It comes from the Supreme Court case Lawn.
Speaker 7: So now we're all trying to figure out what the
Speaker 7: Supreme Court mat and how you translate a case in
Speaker 7: nineteen eighty eight to today.
Speaker 2: Coming up next on the Bloomberg Law Show, I'll continue
Speaker 2: this conversation with Professor Ann Lipton of Tulane University, and
Speaker 2: we'll talk about the split in the circuit. Remember, you
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Speaker 1: This is Bloomberg Law with June Grosso from Bloomberg Radio.
Speaker 2: You're listening to a special best of edition of the
Speaker 2: Bloomberg Law Show. I've been talking to business law professor
Speaker 2: and Lipton of Tulane University about what it means to
Speaker 2: sell securities in the age of YouTube and Instagram. So
Speaker 2: the Ninth and the eleventh Circuits are they in sync
Speaker 2: their rulings.
Speaker 7: Yeah, they seem to be following the same path at
Speaker 7: you know, at least at the very least these sort
Speaker 7: of widespread social media campaigns for sufficient. But what's really
Speaker 7: 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, does whatever it
Speaker 7: does to say, you know, here's an air drop of
Speaker 7: new security or whatever. And the court said, well, that's
Speaker 7: just not enough. So now we have all kinds of
Speaker 7: questions like if social media is permissible, if you don't
Speaker 7: have the restriction of direct contact, then how much urging
Speaker 7: is enough to qualify solicitation? Given that in Pinter, the
Speaker 7: Supreme Court's concern was we don't want just substantial participation
Speaker 7: to be enough. And the reason we don't was because
Speaker 7: we want people to have certainty as to when they
Speaker 7: are potentially liable or not. It's important that we have certainty.
Speaker 2: And which circuits have a different take on this than
Speaker 2: the 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 2: Why don't don't these in quote sellers want to register
Speaker 2: just to be safe?
Speaker 7: So first of all, the crypto people, I'll 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 open 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 2: So then will it be up to the Supreme Court
Speaker 2: 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 now and then. I mean, first
Speaker 7: of all, if all the circuits come to settle on something,
Speaker 7: I mean, the Supreme Court doesn't have the kind of
Speaker 7: passion for securities cases that say I do. So if
Speaker 7: the circuits coalesce around a principle that's coherent, then the
Speaker 7: Supreme Court may not step in at all. And you know,
Speaker 7: we can all argue about it, but you know, I'm
Speaker 7: not convinced that crypto is you know, the wave of
Speaker 7: the future. So at some point, if crypto has becomes
Speaker 7: less popular, then we may just see less of these cases.
Speaker 7: I mean, Regulation A was how this came up in
Speaker 7: the Ninth Circuit, and that will still exist because that's
Speaker 7: sort of a formal disclosure space for securities that you
Speaker 7: don't want to do full registration for ok isn't really
Speaker 7: that popular to begin with, So I mean, if crypto
Speaker 7: becomes less of a thing, it may simply be that
Speaker 7: the distute kind of settles down by itself.
Speaker 2: Well, it's been great to talk to you in I
Speaker 2: love your enthusiasm about securities law. That's Anne Lipton, a
Speaker 2: business law professor at Tulane University. And that's it for
Speaker 2: this edition of the Bloomberg Law Show. Remember you can
Speaker 2: always get the latest legal news by listening to our
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