On December 21, 2022, the Ninth Circuit sent a holiday gift to investor plaintiffs and a stocking full of coal to promoters advertising on social media. If you are thinking about touting your business plan on Instagram, think again. The court held for the first time that mass, online promotions qualify as offers under the Federal Securities Act of 1933. In so doing, the court reversed the trial court’s dismissal of a complaint alleging material misstatements or omissions in investment offering materials against Grant Cardone (“Cardone”) and Cardone Capital, LLC (“Cardone Capital”) (Pino v. Cardone Cap., LLC, No. 21-55564, 2022 WL 17826876 (9th Cir. Dec. 21, 2022)).
In 2017, Cardone founded Cardone Capital and was its CEO and sole Manager. Cardone Capital was formed as a real estate management company to invest in property throughout the United States by pooling money from multiple investors into funds. Investments in Fund V and Fund VI—the funds pertinent to this case—were exempt from registration with the SEC under Regulation A, but still required a submission to the SEC of an offering statement subject to qualification by the SEC before the offering could proceed. Fund V began receiving subscriptions on December 12, 2018 and raised $50,000,000 as of September 20, 2019. Fund VI began receiving subscriptions on October 16, 2019 and raised $50,000,000 as of June 25, 2020.
Plaintiff, Luis Pino (“Pino”), alleged that he invested a total of $10,000 in Fund V and Fund VI. Pino also alleges that Cardone and Cardone Capital used social media to mass promote the funds and made statements that were materially misleading in violation of the Securities Act. For instance, in a YouTube video published on April 22, 2019, Cardone states “it doesn’t matter whether [the investor] [is] accredited [or] non-accredited…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.”
Additionally, Cardone and Cardone Capital posted on Instagram about internal rates of return, distributions, and long-term appreciation. For example, on February 5, 2019, on Cardone’s personal Instagram account, he asks, “Want to double your money[?]” and then states an investor could receive $480,000 in cash flow after investing $1,000,000, achieve “north of 15% returns after fees,” and obtain a “118% return amounting to 19.6% per year.”
The District Court dismissed, holding that Cardone and Cardone Capital did not qualify as statutory sellers under Sec. 12(a)(2) of the Securities Act. Sec 12(a)(2) 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….”(15 U.S.C. § 77l(a)(2)). The District Court held that Cardone and Cardone Capital did not meet the definition of one who “offers or sells a security” as the alleged solicitations consisted solely of statements made on social media and neither defendant directly nor actively solicited Pino’s investment.
The Ninth Circuit reversed and held for the first time that mass, online promotions qualify as offers under Sec. 12(a)(2) thus making Cardone and Cardone Capital statutory sellers. The Court reasoned the Securities Act contains broad language authorizing the purchaser of a security to file an action against any person who offers or sells a security by means of a prospectus or oral communication that misleads or omits material facts. Additionally, the definitions of "offer" and "prospectus" were broad and originally included communications through radio and television urging Congress, when passing the Securities Act, to contemplate that “broadly disseminated, mass communications with potentially large audiences would fall within the Act’s scope.”
Issuers doing business in the Pacific Northwest likely know that the Oregon and Washington securities laws already impose joint and several liability on certain parties who materially aid in the sale of securities by means of untrue statements or omissions of material facts. Oregon’s sweep is broader, imposing liability on “every person who participates or materially aids in the sale” (ORS 59.115(3)). And Washington holds all owners, employees, officers, directors, and other similar agents of a seller jointly and severely liable to the extent they “materially aid[] in the transaction” (RCW 21.20.430(3)).
As of the date of this post, there are no published decisions in either Oregon or Washington assessing whether social media posts like Cardone’s constitute “material aid” or “participation” in the sale of a security. But courts in both states often look to the federal courts’ interpretation of the securities laws (Helenius v. Chelius, 161 Wash.App. 421, 448, 120 P.3d 954 (2005); Karsun v. Kelly, 258 Or. 155, 161, 482 P.2d 533 (1971)), and given the states’ long-standing policy of providing broad protections to investors, we would not be surprised to see courts here adopting the Ninth Circuit’s reasoning.
The Ninth Circuit could have dramatic implications at both the state and federal level for online promotors who propagate communications through social media attempting to induce the purchase of a security or interest in a security. Such promotors are now exposed to liability for any misleading statement or the omission of material facts, a result made more likely in the world of social media that uses short and flashy posts and videos to grab the audience’s attention. Sellers should think twice before pitching their investment plans on social media platforms.
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