In an opinion that could have serious adverse effects for social media influencers, the Ninth Circuit recently reinstated litigation against influencer and real estate syndicator Grant Cardone and his company, Cardone Capital, LLC, holding that Section 12 of the Securities Act of 1933 does not require that a solicitation be directed or targeted to a particular plaintiff.
Instead, a person can solicit a purchase, within the meaning of the Securities Act, by promoting the sale of a security in mass communication.
A copy of the opinion in Pinto v. Cardone Capital, LLC et al. can be found here: Link to Opinion.
In his first amended complaint, the plaintiff alleged that, in relation to soliciting investments in two funds, Cardone and Cardone Capital made untrue statements of material fact or concealed or failed to disclose material facts in Instagram posts and YouTube videos posted between Feb. 5, 2019, and Dec. 24, 2019.
For example, in a YouTube video, Cardone stated that “it doesn’t matter whether [the investor] [is] accredited [or] non-accredited…you’re going to 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. They call me Uncle G and some people call me Nostradamus, because I’m predicting the future, dude; this is what’s gonna happen.”
Similarly, in an Instagram post, Cardone asks potential investors, “[w]ant to double your money[?]” and states that an investor could receive $480,000 in cash flow after investing $1,000,000, achieve “north of 15% returns after fees,” and obtain “118% return amounting to 19.6% per year.”
In dismissing the plaintiff’s complaint, the district court held that Cardone and Cardone Capital did not qualify as statutory sellers under Section 12(a)(2) of the Securities Act because the solicitations consisted solely of statements made on social media highlighting the benefits of investing in the funds at issue.
Because neither Cardone nor Cardone Capital directly and actively solicited the plaintiff’s investment, and the plaintiff did not allege that he relied on any such solicitations, the district court held that neither could be held liable as a “seller” under Section 12(a)(2).
On appeal, the Court noted that 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 material fact or omits to state a material fact…to the person purchasing such security from him.” 15 U.S.C. § 771(a)(2). Section 15 of the Securities Act imposes secondary liability on anyone who “controls” an entity that violates Section 12. Thus, the Court framed the issue before it as whether Cardone and Cardone Capital count as persons who “offer or sell” securities under §12(a) based on their social media communications to prospective investors.
In Pinter v. Dahl 486 U.S. 622, 647-48 (1988), the Supreme Court held that a person may be liable as a “seller” under the predecessor version of Section 12(a) if the person either (1) passes title to the securities to the plaintiff, or (2) engages in solicitation, i.e., “solicits the purchase [of securities], motivated at least in part by desire to serve his own financial interests or those of the securities owner.”
The Court noted that there were no allegations that Cardone or Cardone Capital passed title to the securities in question, but that there was no question that they had financial interests tied to the funds. Specifically, Cardone Capital received 35% of the funds’ profit and Cardone personally controlled Cardone Capital. Therefore, the question was whether Cardone and Cardone Capital “engaged in solicitation.”
The Supreme Court has not opined on whether a solicitation must be direct or targeted towards a particular person to fall within Section 12. The Eleventh Circuit, however, recently held that videos posted on YouTube and similar websites can constitute solicitation under Section 12, even if the promoters did not directly target the purchasers. See, Wildes v. BitConnect Int’l PLC, 25 F.4th 1341 (11th Cir. 2022).
The Eleventh Circuit concluded that, to qualify as a solicitation under Section 12, a person must “urge or persuade” another to buy a particular security, but those efforts at persuasion need not be personal or individualized. Id. at 1346. The Court agreed with the Eleventh Circuit that nothing in the Act indicates that mass communications, directed to multiple potential purchasers at once, fall outside the protections of the Securities Act.
To the contrary, the Securities Act is broad, authorizing a 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 mislead or omits material facts.” 15 U.S.C. § 77l(a)(2). Significantly, “prospectus” is defined as “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.” 15 U.S.C. § 77b(a)(10).
Although the Securities Act predates the internet, the Court opined that the inclusion of radio and television communications indicates Congress contemplated that broadly disseminated, mass communications with potentially large audiences would fall within the scope of the Securities Act.
Ultimately, the Court believed that the advertisements at issue were the types of potential injurious solicitations that are intended to command attention and persuade purchasers to invest in the funds during the “most critical” first stage of a selling transaction, when the buyer becomes involved. According to the Court, to conclude that defendants’ social media communications fall outside the protections of the Securities Act would be at odds with Congress’s remedial goals.
Accordingly, the Court reversed the district court’s dismissal of plaintiff’s complaint, holding that Section 12 does not contain a 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.