How Are Social Media and Other Technology Changing Securities Laws? and Why?
Introduction
“Give me Technology or give me Death!” Patrick Henry actually said “Give me Liberty or give me Death,” but for 21st Century entrepreneurs, the freedom to use technology tools to raise capital is literally often the difference between the life and death of their businesses.
That's because technology has changed many of the ways we do business and live our lives. It is not surprising that technology is taking over how we raise capital.
Technology communications freedom
Technology gives us the freedom to communicate:
- With one person on the other side of the world at any time of the day or night.
- With all our friends at the same time.
- With thousands of people we do not know, but who share common interests.
This kind of communications freedom is intoxicating because powerful communications tools were too expensive for average people until the 21st Century began. Laws about using technology to communicate when you raise capital are still playing catchup. Securities regulators face a time problem:
- Technology changes quickly.
- How people use technology is changing even faster.
- Laws change slowly.
Raising capital is a highly regulated activity. Until recently, the only technologies you could use to raise capital in unregistered offerings were telephone calls and emails to limited numbers of potential investors. And you were supposed to only talk with people you already had some type of personal or business relationship with. Cold calling and email blasts were prohibited. These communications restrictions seem quaint today—like requiring people to write letters with quill pens and ink wells. But unless you know how to use the new securities rules, you will be stuck in the quill pen era when you raise capital.
A decade ago few people had heard of Social Media.
Certainly, even fewer people were thinking about how Social Media would change securities laws.
Social Media started as just a toy for teenagers.
What a difference 10 years make!
What happens when a toy becomes a primary channel for conducting business (including raising capital)?
Freedom creates bumps
Expect more than a few bumps in the road. Some bumps will be small, but the collision of Social Media and securities laws is generating the types of sparks one might expect from the epic battle between the Irresistible Force and the Immovable Object:
- Will the SEC and immovable securities laws survive the irresistible Social Media force?
- Or will Social Media change how we raise capital like it has already changed many other things people do every day?
To answer these questions, we will examine a wide range of issues related to Public Private Placements (aka “Crowdfunding”) that the JOBS Act created, including:
- Why breaches in its long-standing wall between registered public offerings and private placements worries the SEC. You cannot make the new rules work, unless you fully understand the SEC's concerns.
- Reasonable rules for using Social Media in Public Private Placements.
- How Social Media can help members of the investor “crowd” help one another avoid being victimized by securities scams.
- How Social Media can create better disclosures and bring fraud to the attention of the SEC and state securities regulators before it is too late to save investors' money.
- How to use Social Media in Public Private Placements to sell efficiently while still complying with the antifraud rules.
- How to deal with the special challenges you face when using Social Media that can cause you to violate disclosure requirements or lose your registration exemption.
- Issues about how the SEC might integrate Public Private Placements with other securities offerings you make.
Relationship between laws and reality
Before we jump into legal analysis, let's remind ourselves about the basic relationship between reality and laws:
- Laws work only if laws reflect reality.
- Laws might attempt to channel and shape reality, but laws fail if they oppose reality or are based on incorrect perceptions of reality.
- The road getting there might be bumpy at times, but in the end reality prevails.
- Reality prevails because people use reality to guide their behavior. Ethics are reality based. Most people do not check to determine whether what they are doing is legal, if it seems like a sensible and ethical thing to do in light of how they perceive reality.
That's why we will base our legal analysis on understanding the reality of how Social Media and other technology has changed how people communicate with one another and how they think about their communications:
- How do people use Social Media?
- How is Social Media different from earlier advertising media and communications tools?
If we ignore these realities, we risk:
- Triggering millions of unintentional securities laws violations by people who are only guilty of using reality to guide their behavior. Being reality-based should not put you in legal jeopardy.
- Intentional violations of securities laws by people who are trying to overcome barriers that don't make sense.
It is fair to question whether it is wise to base securities laws on how people perceive reality. Shouldn't there be a more objective standard that does not change as perceptions change?
Perhaps, but securities laws have always been based on how people perceive reality. What is more fundamental to securities laws than material facts? But the definition of material facts is whatever a reasonable investor would think is important to making an investment decision. The definition of material facts is sufficiently flexible to accommodate changing perceptions about what facts are important to investment decisions. Why then shouldn't changes in what people think about communications and media affect what securities laws allow people to do?
Once we understand that ignoring the new reality Social Media is creating is not a viable alternative, it will be much easier to create:
- Reasonable securities rules to regulate using Social Media and other technology in Public Private Placements.
- Strategies to comply with securities rules without making it impossible to effectively raise capital using Social Media and other technology in Public Private Placements.
By Jim Verdonik. Jim Verdonik began practicing securities law with a large New York City law firm where he primarily represented investment bankers and venture capital funds in transactions with technology and science based businesses. Since relocating to Research Triangle, NC, he has counseled both companies and investors about securities, business and technology commercialization issues. Excerpted from Crowdfunding: A Legal Guide to Investment & Platform Regulation, 2016 ed., available for purchase on ThomsonReuters.com. This practical guide offers readers comprehensive and straightforward information so that they can make strategic decisions with regard to raising capital. The guide answers questions on a wide range of current and future crowdfunding issues.