Securities Regulation and Social Media Seth C. Oranburg* Federal securities regulation originally divided corporate --- inance into two neat categories, public and private. In 1933, private --- inancing was limited to “sophisticated” investors but otherwise lightly regulated. Public --- inancing became heavily regulated. In 1982, the SEC introduced Reg D, which introduced the concept o --- “general solicitation” to clari --- y the distinction between public and private o --- --- erings. Reg D is well understood to prohibit newspaper advertisements and permit direct solicitations to venture capital investors. This enabled great wealth consolidation in regions like Silicon Valley while e --- --- ectively banning general solicitations in private o --- --- erings. Now, social media communication challenges the de --- inition o --- “general solicitation.” Although social media comes in a multitude o --- --- orms, there is no guidance as to whether a single post or tweet might violate securities regulations. Con --- usion and --- ear o --- violating the ban on general solicitation chills online investment, even though online investment technology o --- --- ers new and better means o --- protecting investors --- rom --- raud and undue risk. Meanwhile, society has grown wary o --- regulations that tend to concentrate immense wealth amid a privileged --- ew. Movements like Occupy Wall Street demanded that ordinary Americans gain equal access to --- inancial markets, and legislators adopted equal access to capital as the national entrepreneurship policy. In today’s interconnected age, the general solicitation ban has a disparate impact on young, rural, poor, and otherwise less established entrepreneurs. It systematically advantages established, urban, wealthy, and other well- connected businesspeople. The unintended consequence o --- the general solicitation ban is a disparate impact upon the members o --- society who could bene --- it the most --- rom entrepreneurial opportunities. The general solicitation ban helps the rich and well connected get richer while excluding new entrepreneurs and diverse investors --- rom capital markets. The ban is technologically and socially out o --- date. Accordingly, the ban carries the heavy burden o --- proving that it prevents enough --- raud to be worth its cost. It * Assistant Pro --- essor, Duquesne University School o --- Law; A --- --- iliated Scholar, The Classical Liberal Institute at NYU School o --- Law; J.D., The University o --- Chicago School o --- Law; B.A., The University o --- Florida. 15 Electronic copy available at: https://ssrn.com/abstract=3548312 16 Loyola University Chicago Law Journal [Vol. 52 has not met this heavy burden. There --- ore, the general solicitation ban should be abolished. INTRODUCTION ....................................................................................... 17 I. AN ILLUSTRATION OF THE PROBLEM: A TALE OF TWO ENTREPRENEURS ........................................................................ 18 A. The Small-Town Entrepreneur............................................. 18 B. The Big-City Businessperson ............................................... 20 C. Analysis o --- the Problem ....................................................... 22 II. SECURITIES REGULATIONS OF GENERAL SOLICITATION ..................... 23 A. Historical Background......................................................... 24 B. The Securities Act o --- 1933 ................................................... 29 1. Section 3(b) .................................................................... 30 2. Section 4(a)(2) ............................................................... 32 C. Regulation D ........................................................................ 35 1. Rule 502(c)..................................................................... 37 2. Rule 504 ......................................................................... 39 3. Rule 506 ......................................................................... 41 a. Rule 506(b) .............................................................. 42 b. Rule 506(c) .............................................................. 42 D. Regulation Crowd --- unding ................................................... 43 E. Regulation A ........................................................................ 44 F. Regulation S ......................................................................... 46 III. SOCIAL MEDIA INVESTMENT PLATFORMS ........................................ 47 A. Angel Investment Portals ..................................................... 47 B. Equity Crowd --- unding Portals .............................................. 50 C. Mini-IPO Portals ................................................................. 53 D. Analysis o --- Investment Plat --- orms ........................................ 55 1. Investor Scrutiny ........................................................... 55 2. Financial Focus .............................................................. 56 3. O --- --- ering Volume ............................................................ 56 IV. “GENERAL SOLICITATION” ON SOCIAL MEDIA ................................. 57 V. THE DEBATE ABOUT GENERAL SOLICITATION .................................. 63 CONCLUSION........................................................................................... 66 Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 17 INTRODUCTION Startup entrepreneurs’ --- irst round o --- --- undraising usually comes --- rom --- riends and --- amily.1 The SEC permits such --- undraising so long as the entrepreneurship does not “generally solicit”2 the --- unds. This rule was relatively clear in an analog age, where a handwritten letter to Grandma was not a general solicitation but an advertisement in the New York Times clearly was. But how does this rule apply to the digital age, where social media is the dominant plat --- orm --- or communication? This question is increasingly relevant today, when nearly one million people become new active social media users every day.3 Already, almost hal --- o --- the world’s population uses social media. The world’s 4.4 billion internet users spend an average o --- six-and-a-hal --- hours online every day, and three o --- the top ten most visited websites are social media sites.4 More to the point, securities regulations themselves have had a major impact on social media. Dozens o --- new social media investing plat --- orms have recently emerged in a direct response to the Jumpstart Our Business Startups (JOBS) Act o --- 2012, which permits new ways to sell securities online.5 Entirely new industries have --- ormed around “crowd --- unding.”6 Yet a --- undamental question remains. Entrepreneurs are still prohibited --- rom raising money --- rom nonaccredited investors via a general solicitation, but what is a general solicitation on social media? This is not just a theoretical question but also a practical one; today’s entrepreneurs might think nothing o --- sharing in --- ormation about their startup --- undraising with --- riends and --- amily on Facebook, Twitter, or Instagram. Yet improper 1. Seth C. Oranburg, Bridge --- unding: Crowd --- unding and the Market --- or Entrepreneurial Finance, 25 CORNELL J. L. & PUB. POL’Y 396, 410 (2015) (explaining how the startup --- undraising cycle begins with seed --- unding, which generally comes --- rom --- amily, --- riends, and --- ools). 2. The SEC de --- ines “general solicitation” to include “advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. In addition, the use o --- an unrestricted, and there --- ore publicly available, website constitutes general solicitation.” Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A O --- --- erings: A Small Entity Compliance Guide, SEC (Sept. 20, 2013), https://www.sec.gov/in --- o/smallbus/secg/general-solicitation-small-entity-compliance-guide.htm [https://perma.cc/F996-Q83X]. 3. Simon Kemp, Digital 2019: Global Internet Use Accelerates, WE ARE SOC. (Jan. 31, 2019), https://wearesocial.com/us/blog/2019/01/digital-2019-global-internet-use-accelerates [https://perma.cc/LG5B-4JEY]. 4. The third most visited web site is Facebook.com, the sixth most visited site is Twitter.com, and the seventh most visited site is Instragram.com. Martin Armstrong, The World’s Most Popular Websites, STATISTA (Nov. 25, 2019), https://www.statista.com/chart/17613/most-popular- websites/ [https://perma.cc/88N8-JULR]. 5. See CROWDFUND Act, 15 U.S.C. § 77d–1 (creating a “crowd --- unding” exemption). 6. Crowd --- unding is de --- ined as “raising a large amount o --- money --- rom a large number o --- people via the internet.” Seth C. Oranburg, Hyper --- unding: Regulating Financial Innovations, 89 U. COLO. L. REV. 1033, 1078 (2018). Electronic copy available at: https://ssrn.com/abstract=3548312 18 Loyola University Chicago Law Journal [Vol. 52 use o --- social media could violate securities regulations, thus making the transaction voidable or even resulting in --- ines and penalties --- or startups and entrepreneurs. It also brings up important theoretical issues about the meaning and importance o --- the ban on general solicitation. This Article will respond to this --- undamental question in several parts. Part I highlights the problem with the general solicitation ban through the story o --- two entrepreneurs. Part II comprehensively reviews the securities regulations themselves, including the historic ban on general solicitation and recent amendments that allow internet o --- --- erings. Part III looks at the new social media investment plat --- orms that have emerged to exploit these new opportunities and the ways in which present law continues to constrain their business models. Part IV examines the technical nature o --- online social media and attempts to answer the question o --- whether or when a social media post constitutes a general solicitation under present law. Part V discusses the arguments regarding the general solicitation ban. The Article then brie --- ly concludes on why the ban should be eliminated. I. AN ILLUSTRATION OF THE PROBLEM: A TALE OF TWO ENTREPRENEURS The general solicitation ban is counterintuitive and counterproductive in today’s social media world. As these --- ictional illustrations will show, it is --- ar too easy to violate the ban. Moreover, the ban creates a disparate impact against small town entrepreneurs, who, compared to a big city startup, need social media to reach a larger audience. Social media has democratized speech. It also has the power to democratize entrepreneurship. But the ban on general solicitation prevents social media --- rom creating more equal access to entrepreneurship and --- inancial success. A. The Small-Town Entrepreneur Karen was a rural success story. She was the one who got away --- rom Dallas, South Dakota—a town so small that its post o --- --- ice closed in 1973.7 Karen walked thirty minutes each day --- rom her home in Ace’s RV Park to Gregory High School. When she graduated in 2013, most o --- her twenty- --- our classmates went to work --- or the local municipal airport, 7. The population o --- Dallas, South Dakota, was 120 at the 2010 census. While this is an extreme example, small towns are common in America: about 59.5 million people (almost 20% o --- the national population) live in rural areas. UNITED STATES CENSUS 2010, U.S. CENSUS BUREAU (2010). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 19 waited tables in Mary Bob’s Bar8 or Sissy’s Ca --- é,9 or joined the army. But Karen had greater ambitions. She studied hard and won a partial scholarship to the University o --- South Dakota Beacom School o --- Business.10 Throughout school, Karen paid her bills by managing the Nature’s Way Juice Bar in nearby Sioux Falls.11 She earned a Master o --- Business Administration (MBA) in 2018. Karen wanted to use her new skills and knowledge to help Dallas become more like its namesake in Texas. She wanted to be near her --- amily, too, so she moved back home and set about starting a new business there. She was determined to open a juice bar so Dallas residents would have a healthy eating option. She --- ound a suitable location and shopped online --- or all the equipment she would need. The problem was --- inancing the startup costs. Karen was saddled with debt --- rom student loans and did not have cash in the bank. Her mother was in poor health, out o --- work, and barely able to a --- --- ord rent in her trailer park. In --- act, Karen didn’t know any wealthy people at all. She asked the two banks in Dallas, BankWest and First Fidelity Bank, --- or a loan, but they re --- used to lend money to a --- irst-time entrepreneur with no collateral. Karen was --- rustrated, but she did not give up. Instead, Karen turned to the internet and reengaged with her Facebook group, Juicing --- or Li --- e, a juicing support group with 32,000 members.12 She posted about her dream o --- creating a healthy juice bar in her tiny hometown, and many members on the Facebook group cheered her on. When Karen complained o --- the di --- --- iculty o --- --- undraising --- or a new business in a tiny town with a population o --- less than a hundred people, group members commiserated with her. Then, one day, Jalene, the group’s administrator, publicly endorsed her idea and said, “I’ll give you $100,000 --- or 10% o --- your pro --- its.” A --- ter that, the group --- ollowed, and Karen quickly received commitments --- or a hal --- -million dollars—more 8. See Mary Bob’s Bar, FACEBOOK, https://www. --- acebook.com/pages/Mary- Bobs/200744223360135 [https://perma.cc/7FZR-9LKZ] (last visited Aug. 15, 2020) (showing the Facebook page --- or Mary Bob’s bar). 9. See Sissy’s Ca --- e, FACEBOOK, https://www. --- acebook.com/Sissys-Ca --- e-185098158308681/ [https://perma.cc/349U-9RQ5] (last visited Aug. 15, 2020) (showing the Facebook page --- or Sissy’s Ca --- é). 10. See Beacom School o --- Business, UNIV. OF S.D., https://www.usd.edu/business [https://perma.cc/JL9N-QKRA] (last visited Aug. 15, 2020) (displaying the main page o --- the business schools webpage highlighting themselves as a leader in the region --- or business education). 11. See NATURE’S WAY JUICE BAR, https://natureswayjuicebar.weebly.com/ [https://perma.cc/R5Q5-DSB6] (last visited Aug. 15, 2020) (displaying the webpage --- or Nature’s Way which sells smoothies made --- rom all natural --- ruits and veggies). 12. See Juicing --- or Li --- e—Juicing Support Group, FACEBOOK, https://www. --- acebook.com/ groups/jacquegotthejuice/ [https://perma.cc/65MR-QN3X] (last visited Oct. 25, 2020) (showing a private page --- or supporting those involved with juicing). Electronic copy available at: https://ssrn.com/abstract=3548312 20 Loyola University Chicago Law Journal [Vol. 52 than enough to start her business. Karen was delighted by this success but also a bit nervous because her MBA did not train her in regard to collecting --- unds --- rom investors. She went to her local law --- irm and spoke to an attorney about her issue. He in --- ormed her that she had violated the Securities Act o --- 1933 by “generally soliciting” --- unds --- or her startup. There --- ore, it would be illegal --- or her to raise money --- or her new business. Karen was despondent, and she le --- t with nothing except a $550 legal bill. B. The Big-City Businessperson Kevin always knew he possessed the “entrepreneurial spirit.” Kevin spent his adolescent summers with his --- amily on Martha’s Vineyard, where he drove a dune buggy—a gi --- t --- rom his parents—along the beach, selling ice cold water and soda --- rom the buggy’s cooler. When he entered Scarsdale High School—in Westchester County, New York, where --- amilies have a median household income o --- over $250,000—he was thrilled to learn the school had a LaunchX13 program --- or high school entrepreneurs. He participated in the program and combined it with his love o --- gol --- to design a sensor that could --- it in the head o --- the club and analyze a gol --- er’s swing. Kevin didn’t know how to build such a sensor, but his --- riend Ryan was in the Robotics Club at Scarsdale High and had some ideas. A --- ter graduating high school, Kevin and Ryan matriculated to the nearby Columbia University14 and stayed --- riends. Kevin studied business and Ryan studied engineering. When they graduated, they resolved to make this gol --- sensor idea a reality. 13. LaunchX is a competitive --- our-week intensive program that provides high school students with the opportunity to start their own businesses. Admitted students receive advice --- rom industry experts, gain exposure to potential partners and customers, and learn practical skills to tackle real business challenges, build products, and design e --- --- ective business strategies. The program costs $5,450. About the Program, LAUNCHX, https://launchx.com/summer-program/ [https://perma.cc/S29V-GWFR] (last visited Aug. 15, 2020). 14. Columbia University and the University o --- South Dakota are very di --- --- erent institutions that a --- --- ord their students di --- --- erent opportunities. Columbia is ranked third in the nation, whereas the University o --- South Dakota is tied --- or 263rd place. More relevantly --- or our two entrepreneurs, the average starting salary o --- a Columbia graduate is $67,500, whereas the average starting salary o --- a graduate --- rom University o --- South Dakota is $44,000. The makeup o --- the student body is starkly di --- --- erent, too. Columbia University’s student population nearly has gender parity, with 51% male students and 49% --- emale students. The gender distribution at the University o --- South Dakota is 37% male students to 63% --- emale students. Compare Colum. U. vs. U. o --- S.D., U.S. NEWS & WORLD REP., https://www.usnews.com/best-colleges/com- pare?xwalk_id=190150&xwalk_id=219471 [https://perma.cc/J4RL-3DHP] (last visited Aug. 15, 2020). This has an impact on networking, especially --- or entrepreneurs who need venture capital, as some 93% o --- venture capital investors are male. Gené Teare & Ned Desmond, The First Compre- hensive Study on Women in Venture Capital and their Impact on Female Founders, TECHCRUNCH.COM (Apr. 19, 2016 8:00 AM), https://techcrunch.com/2016/04/19/the- --- irst-com- prehensive-study-on-women-in-venture-capital/ [https://perma.cc/SX6N-E9X5]. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 21 Fortunately, Ryan’s --- ather was a lawyer, so he dra --- ted the incorporation paperwork and paid the --- iling --- ees --- or the budding entrepreneurs. He also invested $10,000 as “seed money” to the newly --- ormed Gol --- Tec, Inc., which is acceptable under current securities regulations.15 The team used the money to create attractive marketing materials and a rough prototype. They entered their prototype in the Columbia Entrepreneurship Innovation and Design Fast Competition and won second place. Although they did not receive any prize money, Kevin and Ryan met several investors who attended the competition and expressed interest in --- unding their venture. One gave Kevin his card and said, “Follow me on AngelList.” Kevin had never heard o --- AngelList be --- ore,16 but he learned that it is an exclusive17 social media network that is open only to high-wealth “accredited” investors. Companies seeking --- unding --- rom these investors can also post there. Kevin recognized dozens o --- people he knew --- rom Martha’s Vineyard and Columbia University on the site. Kevin created a page --- or Gol --- Tec, Inc., and the investor --- ollowed him. The investor’s other --- ollowers --- ollowed suit, and within a week the page had over a thousand views. Using AngelList’s model --- ormat --- or soliciting --- unds --- rom accredited investors, Kevin launched a Series A --- inancing round.18 He took the train to Manhattan a --- ew times to have co --- --- ee and avocado toast with some potential investors who liked the prototype that he showed them. Within a month, Gol --- Tec received commitments --- or $10 million in investments. The company hired a large New York City law --- irm to negotiate and paper the deal. The team paid their $30,000 legal bill --- rom the sale proceeds and used the rest to hire two engineers and begin research and development o --- the Gol --- Tec SmartCoach 1.0. 15. This transaction would probably quali --- y --- or the private placement exemption to the registration requirement o --- the 1933 Securities Act under either Regulation D Rule 504 or 506. Securities Act o --- 1933, ch. 38, 48 Stat. 74 (codi --- ied as amended at 15 U.S.C. §§ 77a-77aa). 16. AngelList advertises itsel --- as the “world’s largest startup community.” The website’s o --- --- erings include employment, investment, advertisement, and research opportunities. Join the World’s Largest Startup Community, ANGELLIST, https://angel.co/ [https://perma.cc/7ZX4-8JAV] (last visited Aug. 15, 2020). 17. See in --- ra Section III.A. 18. Series A --- inancing is typically the stage when venture capitalists— --- und managers who invest other people’s money—invest in start-ups. See Seth C. Oranburg, The Law & Economics o --- the Series A Gap, COLUMBIA L. SCH.: THE CLS BLUE SKY BLOG (Apr. 6, 2015), https://clsbluesky.law.columbia.edu/2015/04/06/the-law-economics-o --- -the-series-a-gap/ [https://perma.cc/F7AH-XNBG] (explaining the di --- --- erences between the discrete stages o --- --- undraising, called “series”). Electronic copy available at: https://ssrn.com/abstract=3548312 22 Loyola University Chicago Law Journal [Vol. 52 C. Analysis o --- the Problem These hypotheticals illustrate critical points about how the general solicitation ban has a disparate impact against rural entrepreneurs. For similar reasons, the ban imposes an un --- air disadvantage on anyone who is less well connected. Essentially, the ban on using social media to solicit --- undraising hurts anyone who is not privileged with personal connections to wealthy investors. Universities might play some role in leveling the playing --- ield, but they can also tilt it --- urther. For example, Karen’s MBA program at the University o --- South Dakota granted her access to the Beacom Invent-to- Innovate Competition, but the --- irst place prize in that competition is only $2,000.19 Columbia University, on the other hand, gives out $2,400,000 to startups across campus each year.20 While it is nominally true that both schools have business competitions, it is not reasonable to consider them equivalent where one pays out 1,200 times more money than the other. Location also plays a huge rule in opportunity. Setting aside the prize money, consider who might attend a pitch competition in Vermillion, South Dakota, versus in New York City, New York. The CrunchBase database o --- startups and investors does not include any investors in Vermillion, South Dakota.21 In addition, there is only one company headquartered there other than the University o --- South Dakota.22 According to the database, there are twenty- --- ive relevant investors in all o --- South Dakota.23 In New York City, on the other hand, there are over 19. Hanna DeLange, Beacom's Invent-to-Innovate Competition Hosted at USD, UNIV. S.D. (Apr. 6, 2017), https://usd.edu/news/2017/beacoms-invent-to-innovate-competition-hosted-at-usd [https://perma.cc/7QJV-X92V]. 20. Columbia Entrepreneurship, Colum. Venture Competition, COLUM. UNIV. (Apr. 6, 2018), https://entrepreneurship.columbia.edu/2018/04/06/winners-2018-columbia-venture-competition/ [https://perma.cc/7C2X-JBL6]. 21. Search Investors in Vermillion, South Dakota, CRUNCHBASE, https://www.crunchbase.com/discover/principal.investors [https://perma.cc/XL88-W68P] ( --- ilter to investors located in Vermillion, South Dakota, to see that there are no results) (last visited Aug. 15, 2020). CrunchBase is a sel --- -described “plat --- orm --- or pro --- essionals to discover innovative companies, connect with the people behind them, and pursue new opportunities. Over 55 million pro --- essionals—including entrepreneurs, investors, market researchers, and salespeople—trust Crunchbase to in --- orm their business decisions.” About Us, CRUNCHBASE, https://about.crunchbase.com/about-us/ [https://perma.cc/QB44-GVSS] (last visited Aug. 15, 2020). 22. Search Companies in Vermillion, South Dakota, CRUNCHBASE, https://www.crunchbase.com/discover/organization.companies/2 --- cab --- 2 --- 6 --- 86e3b2bc4e643 --- 7ded71 34 ( --- ilter to companies headquartered in Vermillion, South Dakota to see that there are only two results) [https://perma.cc/9JH4-6FHU] (last visited Aug. 15, 2020). 23. Search Investors in South Dakota, CRUNCHBASE, https://www.crunchbase.com/discover/principal.investors [https://perma.cc/D4HS-U7Y4] ( --- ilter to investors located in South Dakota to see that there are thirty-six results) (last visited Aug. 15, 2020). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 23 8,000 investors24 and over 25,000 corporate headquarters.25 These regions are incomparable when it comes to an entrepreneur’s ability to make --- ace-to- --- ace contact with potential investors. The internet could provide Karen with some o --- the access to investors that Kevin enjoys. Scholars have recognized that social media had democratized political speech.26 Texting, emailing, and other digital communication has supplanted or replaced analog communication --- orms such as phone calls and in-person conversation.27 In particular, studies have shown that social media can enhance innovation and entrepreneurship in diverse areas such as Ontario, Canada,28 and Nairobi, Kenya.29 Given the incredible power o --- social media to democratize society, especially with regard to creating entrepreneurship and innovation opportunities --- or the rural poor, why does --- ederal law restrict its use? To answer this question thoroughly, we must go back to the beginning o --- the --- ederal securities regulations and trace the thread o --- the general solicitation ban --- rom its legislative intent to its modern-day application. II. SECURITIES REGULATIONS OF GENERAL SOLICITATION To understand the permissibility o --- general solicitation in securities transactions under present law, it is help --- ul to understand the history o --- the original ban on general solicitation and subsequent exemptions thereto. This part will explain the origins and developments o --- the general solicitation ban --- rom its inception to present. 24. Search Investors in New York, New York, CRUNCHBASE, https://www.crunchbase.com/discover/principal.investors [https://perma.cc/9YHX-76HA] ( --- ilter to investors located in New York, New York) (last visited Oct. 26, 2020). 25. Search Companies in New York, New York, CRUNCHBASE, https://www.crunchbase.com/discover/organization.companies/53ad1921a85c926ea --- 535410c6bc 070e [https://perma.cc/2568-6CNL] ( --- ilter to companies headquartered in New York, New York) (last visited Oct. 26, 2020). 26. See, e.g., Clay Shirky, The Political Power o --- Social Media: Technology, the Public Sphere and Political Change, 90 FOREIGN AFF. 28, 34 (2011) (“[T]he Internet spreads not just media consumption, but media production as well—it allows people to privately and publicly articulate and debate a welter o --- con --- licting views.”); CASS R. SUNSTEIN, #REPUBLIC: DIVIDED DEMOCRACY IN THE AGE OF SOCIAL MEDIA 206 (2017) (discussing the importance o --- --- ree speech --- or political movements). 27. Agnieszka McPeak, Disappearing Data, 2018 WIS. L. REV. 17, 69 (2018). 28. Ataharul Chowdhury & Helen Hambly Odame, Social Media --- or Enhancing Innovation in Agri-Food and Rural Development: Current Dynamics in Ontario, Canada, 8 J. RURAL & CMTY. DEV. 97, 98 (2013). 29. Ambrose Jagongo & Catherine Kinyua, The Social Media and Entrepreneurship Growth, 3 INT’L J. HUMAN. & SOC. SCI. 213, 2–23 (2013). Electronic copy available at: https://ssrn.com/abstract=3548312 24 Loyola University Chicago Law Journal [Vol. 52 A. Historical Background The origins o --- present securities regulations can be traced back to October 24, 1929. On this day known as “Black Thursday,” the Dow Jones Industrial Average (DJIA)—a market indicator consisting o --- a weighted average o --- the thirty largest publicly traded companies—lost 11% o --- its value.30 Panic and chaos erupted on the trading --- loor. There was a brie --- rally on Friday as a consortium o --- investment bankers led by Richard Whitney purchased large blocks o --- shares at above-market prices.31 But this only halted the slide be --- ore the weekend. When the markets reopened on October 28, many investors who were trading on margin determined to sell their shares, and the DJIA closed on “Black Monday” at a record loss o --- 13%.32 The next day, the panic reached its zenith, and the DJIA --- ell an additional 12% on “Black Tuesday.”33 The market had lost over $30 billion in just two days.34 The Wall Street Crash o --- 1929 played a major role in ushering in the worldwide Great Depression that would last --- or years.35 The magnitude o --- this --- inancial disaster was unprecedented. All in all, the DJIA --- ell --- rom a high o --- 5,714.08 in August 1929 to a low o --- 818.76 in 1932.36 Indeed, 30. See A Brie --- History o --- the 1929 Stock Market Crash, BUS. INSIDER (Apr. 8, 2018, 12:05 PM), https://www.businessinsider.com/the-stock-market-crash-o --- -1929-what-you-need-to-know- 2018-4 [https://perma.cc/2LX2-4CGR] (“At the closing bell [on Black Thursday], the Dow Jones had --- allen 11% and nearly 13 million shares had exchanged hands, triple the normal trading volume.”); Dow Jones – DJIA – 100 Year Historical Chart, MACROTRENDS, https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart [https://perma.cc/8M2T- YAY5] (last visited Aug. 15, 2020). 31. See A Brie --- History o --- the 1929 Stock Market Crash, supra note 30 (“To stem the rising panic, Richard Whitney, president o --- the New York Stock Exchange and lead broker --- or J.P. Morgan bid $10 higher than the previous per-share bid --- or 25,000 shares o --- U.S. Steel. The strategy worked and the market rebounded.”) 32. See Claire Suddath, Brie --- History o --- the Crash o --- 1929, TIME (Oct. 29, 2008), http://content.time.com/time/nation/article/0,8599,1854569,00.html [https://perma.cc/Q286- LUEN] (“By the end o --- the day, the Dow had dropped 13%. So many shares changed hands that day that traders didn’t have time to record them all.”); Stock Market Crash o --- 1929, BRITANNICA ACADEMIC, https://www.britannica.com/event/stock-market-crash-o --- -1929 [https://perma.cc/498G-P5VQ] (“The panic began again on Black Monday (October 28), with the market closing down 12.8 percent.”) (last visited Aug. 20, 2020). 33. See Stock Market Crash o --- 1929, ENCY. BRITANNICA, https://www.britannica.com/event/stock-market-crash-o --- -1929 [https://perma.cc/8UYD-KFS4] (last visited Aug. 15, 2020) (“On Black Tuesday (October 29) more than 16 million shares were traded. The Dow lost another 12 percent and closed at 198—a drop o --- 183 points in less than two months.”). 34. See Clay Halton, Black Tuesday, INVESTOPEDIA (MAY 1, 2020), https://www.investopedia.com/terms/b/blacktuesday.asp [https://perma.cc/CR48-GJSK] (discussing the stock market crash o --- 1929); see also Suddath, supra note 32 (“In total, $25 billion—some $319 billion in today’s dollars—was lost in the 1929 crash.”). 35. See Christina D. Romer & Richard H. Pells, Great Depression, ENCYC. BRITANNICA (Sept. 10, 2020), https://www.britannica.com/event/Great-Depression [https://perma.cc/C7VW- 3JA8]. 36. Dow Jones - DJIA - 100 Year Historical Chart, supra note 30 (adjusting --- or in --- lation). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 25 it would not be until May 1959 that the market would --- ully recover --- rom this loss, when the market --- inally hit 5,770.29.37 The impact o --- the crash was not merely economic but political and legal as well. American citizens were unemployed and angry. The psychological e --- --- ects o --- the crash are well documented elsewhere, and it is beyond the scope o --- this Article to explain them or to argue which causes resulted in which e --- --- ects. But a sweeping change in American politics is obvious even to the casual observer. Incumbent President Herbert Hoover, who presided during the Crash, lost the 1932 presidential election in a landslide victory --- or Franklin Delano Roosevelt (FDR).38 FDR, --- or his part, won that 1932 election a --- ter a campaign promising traditional economic policies including a balanced budget.39 But by FDR’s 1936 reelection campaign, he had completely changed his tune and adopted (his version o --- ) Keynesian economic theory and Brandeisian regulatory theory. Keynesian economics—the brainchild o --- John Maynard Keynes, who published The General Theory o --- Employment, Interest, and Money in 1936—essentially posits that, in the short run, governments can lessen the severity o --- recessions and depressions by spending.40 In simpli --- ied Keynesian terms, recessions are periods when aggregate demand is low. Government investment in in --- rastructure and similar government expenditures can increase demand by injecting cash directly into the economy, which can create jobs and increase output, sometimes with a multiplier --- actor.41 This stimulation can lessen, or even reverse, the harsh e --- --- ects o --- unemployment and decreased demand during a period o --- economic downturn.42 Keynes also advocated --- or the Federal Reserve to 37. Id. 38. See United States Presidential Election o --- 1932, ENCYC. BRITANNICA, https://www.britannica.com/event/United-States-presidential-election-o --- -1932 [https://perma.cc/SJ9L-V9V8] (last visited Aug. 30, 2020) (providing a historical overview o --- the 1932 election). 39. See id. (“In a series o --- addresses care --- ully prepared by a team o --- advisers popularly known as the Brain Trust, [Roosevelt] promised aid to --- armers, public development o --- electric power, a balanced budget, and government policing o --- irresponsible private economic power.”). 40. See generally JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST, AND MONEY (General Press 2019) (detailing what is Keynesian economics and how spending can help). 41. Alan S. Blinder, Keynesian Economics, LIBR. ECON. & LIBERTY, https://www.econlib.org/library/Enc/KeynesianEconomics.html [https://perma.cc/QFW7-C9ZV] (last visited Aug. 15, 2020) (explaining that Keynesian economic theory promotes a lowering o --- interest rates during the “bust” cycle to promote private borrowing). 42. See generally Sarwat Jahan et al., What Is Keynesian Economics?, 51 FIN. & DEV. (IMF Sept. 2014), https://www.im --- .org/external/pubs/ --- t/ --- andd/2014/09/basics.htm [https://perma.cc/HE98-NRLF] (discussing the basic tenets o --- Keynesian economics). Electronic copy available at: https://ssrn.com/abstract=3548312 26 Loyola University Chicago Law Journal [Vol. 52 reduce interest rates to promote private borrowing and spending43 and to discourage excessive saving.44 It is critical to note that Keynesian economics puts the --- ederal government in a much more active role vis-à- vis the economy as compared with classical economic theory (which generally proscribed a laissez- --- aire role o --- government).45 Keynes met FDR on May 28, 1934 and explained his theories to the president in considerable detail.46 A --- ter their meeting, Keynes met with Secretary o --- Labor Frances Perkins and clari --- ied the multiplier e --- --- ect in oversimpli --- ied terms. He explained that a dollar spent by the government on a public work’s project is a dollar given to the grocer, who in turn spends that dollar on supplies --- rom the wholesaler, who in turn spends that dollar on supplies --- rom the --- armer, essentially creating --- our dollars’ worth o --- output --- rom a one dollar investment.47 Perkins later noted that Keynes may have overestimated FDR’s understanding o --- the underlying mathematical principles behind his ideas and that the meeting may have been more productive i --- Keynes had explained his theories in layman’s terms, as he had done with Perkins.48 Although their initial meeting was brie --- , Keynes made a pro --- ound impact on the president, who was then a vocal opponent o --- the classical laissez- --- air role o --- the government. Inspired by Keynes’s theories, FDR’s New Deal set about an unprecedented expansion o --- the --- ederal government that FDR enacted between 1933 and 1938.49 It included the 43. What is Keynesian Economic Theory? CORP. FIN. INST., https://corporate --- inanceinstitute.com/resources/knowledge/economics/keynesian-economic- theory/ [https://perma.cc/VL8A-9QA5] (last visited Aug. 15, 2020). 44. Jim Chappelow, Keynesian Economics, INVESTOPEDIA, (updated Apr. 30, 2020) https://www.investopedia.com/terms/k/keynesianeconomics.asp [https://perma.cc/5S2J-FJ4J] (“Keynes also criticized the idea o --- excessive saving, unless it was --- or a speci --- ic purpose such as retirement or education. He saw it as dangerous --- or the economy because the more money sitting stagnant, the less money in the economy stimulating growth. This was another o --- Keynes’s theories geared toward preventing deep economic depressions.”). 45. Compare Keynesian Economics, ENCYC. BRITANNICA https://www.britan- nica.com/topic/Keynesian-economics [https://perma.cc/6D9C-97NG] (Apr. 18, 2017), with Lais- sez- --- aire Economics, ENCYC. BRITANNICA, https://www.britannica.com/topic/laissez- --- aire [https://perma.cc/XM4N-BPQ9] (Oct. 29, 2019). 46. See May 28th, 1934, FRANKLIN D. ROOSEVELT: DAY BY DAY, PARE LORENTZ LIB., http://www. --- drlibrary.marist.edu/daybyday/daylog/may-28th-1934/ [https://perma.cc/XWU6- 3HEK] (last visited Aug. 15, 2020) (providing a log o --- the president’s activities --- or May 28, 1934). 47. NICHOLAS WAPSHOTT, KEYNES HAYEK: THE CLASH THAT DEFINED MODERN ECONOMICS 161–62 (2011). 48. See FRANCES PERKINS, THE ROOSEVELT I KNEW 9 (1946) (recalling that, a --- ter Keynes’s meeting with FDR, Keynes mentioned to then-Secretary o --- Labor, Frances Perkins, that “he had ‘supposed the President was more literate, economically speaking.’”). 49. See generally New Deal: United States History, ENCYC. BRITANNICA (Dec. 3, 2019), https://www.britannica.com/event/New-Deal [https://perma.cc/MA9W-YA6A] (FDR’s New Deal brought economic relie --- and re --- orms to agriculture, --- inance, waterpower, labor, and housing, industries greatly increasing he scope o --- the --- ederal government’s scope). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 27 creating o --- the Civilian Conservation Corps,50 the Public Works Administration, the Works Progress Administration, the Resettlement Administration, the Rural Electri --- ication Administration, the Civil Works Administration, the Farm Security Administration, the Federal Crop Insurance Corporation, the Social Security Administration, and other government agencies and programs.51 These programs were obviously not --- ree. Coincidentally, with the expansion o --- the --- ederal government came a great increase in income taxes. In 1931, the highest tax rate was 25%, and the average taxpayer paid $76.30 in --- ederal income taxes.52 The IRS collected a total o --- $246 million in income tax that year.53 By 1940, the highest rate was 79%,54 and the IRS collected $6.548 billion.55 On the regulatory --- ront, FDR was inspired by another leading thinker o --- the day, Justice Louis Dembitz Brandeis. Brandeis was an American Jew born to immigrant parents --- rom Bohemia who raised him in a secular home. Despite these humble beginnings, Brandeis graduated Harvard Law School at age twenty and --- ounded a law --- irm in Boston. Perhaps because o --- his background, Brandeis became well recognized as the “People’s Lawyer” through his leadership --- or progressive social causes.56 50. The Civilian Conservation Corps created many o --- America’s national parks. The Civilian Conservation Corporations Timeline: The Evolution o --- the CCC, PBS, https://web.archive.org/web/20161225041953/https://www.pbs.org/wgbh/americanexperience/ --- ea tures/timeline/ccc/ (noting that FDR signed the Federal Unemployment Relie --- Act into law on March 31, 1933, and this law created the program commonly known as the Civilian Conservation Corps, or “CCC”); Civilian Conservation Corps, HISTORY (Oct. 17, 2018), https://www.history.com/topics/great-depression/civilian-conservation-corps [https://perma.cc/GLR9-LWDA] (describing the CCC as a work relie --- program that put millions o --- young men to work, creating the national and state park systems that we enjoy today). 51. See also New Deal Programs, LIVING NEW DEAL, (May 20, 2020) https://livingnewdeal.org/what-was-the-new-deal/programs/ [https://perma.cc/3QZX-9E46] (last visited August 27, 2020) (listing all the programs and agencies created by the New Deal). 52. STATISTICS OF INCOME FOR 1931, U.S TREASURY DEPARTMENT BUREAU OF INTERNAL REVENUE 4, 8 (1933), https://www.irs.gov/pub/irs-soi/31soirepar.pd --- [https://perma.cc/DB2G- 25HG] (“The average net income --- or 1931 was $4,217.40 --- or all returns and $6,094.22 --- or taxable returns, the average amount o --- tax liability was $76.30 --- or all returns and $161.34 --- or taxable returns, and the average tax rate was 1.81 percent --- or all returns and 2.65 percent --- or taxable returns.”). 53. Id. at 6 (showing simple and cumulative distribution o --- individual returns --- or 1931, by net income classes, number o --- returns, net income, tax, and percentages). 54. U.S. Federal Individual Income Tax Rates History, 1862–2013, TAX FOUND. (Oct. 17, 2013), https://tax --- oundation.org/us- --- ederal-individual-income-tax-rates-history-1913-2013- nominal-and-in --- lation-adjusted-brackets/ [https://perma.cc/DTH5-9LVA]. 55. Federal Tax Revenue by Source, 1934–2018, TAX FOUND. (Nov. 21, 2013), https://tax --- oundation.org/ --- ederal-tax-revenue-source-1934-2018/ [https://perma.cc/QE6C-ASNY] (chart revealing Federal Government receipts by source in millions o --- dollars). 56. See Louis Brandeis, ENCYC. BRITANNICA (Nov. 9, 2019), https://www.britannica.com/biography/Louis-Brandeis [https://perma.cc/GN98-2F3R] (discussing Brandeis’ characteristics that led to him being called the “People’s Lawyer”). Electronic copy available at: https://ssrn.com/abstract=3548312 28 Loyola University Chicago Law Journal [Vol. 52 Brandeis was notably anti-corporate. He denounced “cutthroat competition” and, ironically, also denounced the evils o --- monopoly: We learned long ago that liberty could be preserved only by limiting in some way the --- reedom o --- action o --- individuals; that otherwise liberty would necessarily yield to absolutism; and in the same way we have learned that unless there is regulation o --- competition, [capitalism’s] excesses will lead to the destruction o --- competition, and monopoly will take its place.57 In 1914, Brandeis published the book Other People’s Money and How the Bankers Use It, which attacked investment --- unds and called --- or a breakup o --- the so-called Money Trust.58 He also coined a phrase which would become the watchwords o --- the New Deal regulatory regime: “Publicity is justly commended as a remedy --- or social and industrial diseases. Sunlight is said to be the best o --- disin --- ectants; electric light the most e --- --- icient policeman.”59 In 1916, President Woodrow Wilson nominated Brandeis to the Supreme Court, to which he was con --- irmed on June 1 o --- that year.60 During his subsequent twenty-three years o --- service on the bench, Brandeis became one o --- the most in --- luential members o --- that high court. Jacket Library Publishers reprinted Brandeis’s polemic essays in 1933,61 resurrecting the attack on investment --- unds re --- lected in popular opinion at the time. American sentiment --- avored expansive New Deal regulations. Other People’s Money supported the breakup o --- the Money Trust. Its more --- amous passages are o --- ten quoted in support o --- New Deal-era securities regulations.62 And those New Deal regulations were numerous. During FDR’s term, 57. Louis B. Brandeis, The Regulation o --- Competition Versus the Regulation o --- Monopoly, Address to the Economic Club o --- New York (Nov. 1, 1912) (transcript available at Louis D. Brandeis School o --- Law Library), https://louisville.edu/law/library/special-collections/the-louis-d.- brandeis-collection/the-regulation-o --- -competition-versus-the-regulation-o --- -monopoly-by-louis-d.- brandeis [https://perma.cc/7H5M-86FE]. 58. LOUIS BRANDEIS, OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT 69–91 (1914) (explaining the Serve One Master Only advice on regulating the Money Trust); id. at 4–6 (The Money Trust was the concept that investment bankers had abused the public trust and taken control o --- numerous industries.). 59. BRANDEIS, supra note 58 at 92 (discussing the role publicity played in the struggle against the Money Trust). 60. See Andrew Glass, Wilson Nominates Brandeis to Supreme Court, Jan. 28, 1916, POLITICO (Jan. 28, 2019 12:00 AM), https://www.politico.com/story/2019/01/28/this-day-in-politics- january-28-1124759 [https://perma.cc/N2XS-E7AC] (providing that on June 1, 1916, the Senate con --- irmed Brandeis to the Supreme Court by a 47-22 vote). 61. LOUIS BRANDEIS, OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT (Jacket Libr. Publishers 1933) (1914). 62. BRANDEIS, supra note 58, at 92 (Perhaps the most --- amous line in Other People’s Money is its ringing endorsement o --- public disclosure regimes: “Sunlight is said to be the best o --- disin --- ectants; electric light the most e --- --- icient policeman.”). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 29 and very much owing to Roosevelt’s in --- luence, Congress passed the Emergency Banking Relie --- Act, the Economy Act, the Beer-Wine Revenue Act, the Federal Emergency Relie --- Act, the Agricultural Adjustment Act, the Tennessee Valley Authority Act, the National Employment System Act, the Securities Act, the Home Owners Loan Act, the National Industrial Recovery Act, the Glass-Steagall Act, the Gold Reserve Act, the Securities Exchange Act, the Indian Reorganization Act, the National Housing Act, the Federal Farm Bankruptcy Act, the Emergency Relie --- Appropriation Act, the National Labor Relations Act, the Social Security Act, the Banking Act, the Revenue Act, the Soil Conservation Act, the Farm Tenant Act, the Housing Act, the Fair Labor Standards Act, and other regulations.63 The precise nature o --- all the --- oregoing regulations is not critical --- or present purposes o --- this Article, although it is critical to understand the zeitgeist o --- the era. The Securities Act o --- 1933, however, is paramount. B. The Securities Act o --- 1933 The Securities Act o --- 1933,64 also known as the Truth in Securities Act, was very much predicated on the Brandeisian concept o --- “sunlight is the best disin --- ectant.” The Securities Act created a registration and disclosure regime with which issuers must comply be --- ore selling any securities via an instrumentality o --- interstate commerce.65 Securities are de --- ined broadly as to include stocks, investment contracts, and other equity positions.66 Instrumentalities o --- interstate commerce were likewise de --- ined broadly, such that any use o --- the telephone or mail in the o --- --- er or sale o --- stock would probably cause that transaction to come under the purview o --- the Securities Act.67 Registering an o --- --- er or sale o --- securities under the Securities Act requires the public disclosure o --- any and all in --- ormation that a reasonable shareholder would --- ind material in deciding whether to purchase the securities.68 However, registering under the Securities Act is expensive, 63. See Kimberly Amadeo, New Deal Summary, Programs, Policies, and Its Success, THE BALANCE (July 31, 2020), https://www.thebalance.com/ --- dr-and-the-new-deal-programs-timeline- did-it-work-3305598# --- irst-new-deal-and-its-programs [https://perma.cc/8PAY-3QL5] (summarizing the New Deal programs and regulations); see New Deal Programs, supra note 51 (listing the New Deal programs with brie --- summaries). 64. Securities Act o --- 1933, ch. 38, 48 Stat. 74 (codi --- ied as amended at 15 U.S.C. §§ 77a-77aa). 65. See Securities Act o --- 1933, § 5 (outlining prohibitions related to interstate commerce and mail). 66. § 2(a)(1). 67. § 5. 68. §§ 6–8. Electronic copy available at: https://ssrn.com/abstract=3548312 30 Loyola University Chicago Law Journal [Vol. 52 time consuming, and uncertain, such that it is best avoided i --- possible.69 Fortunately, there are two exemptions built into the Securities Act itsel --- . Broadly speaking, there are exempt securities and exempt transactions. Exempt securities, as described in section 3 o --- the Securities Act, can always be sold or resold without registration, but most startup companies do not quali --- y --- or these exemptions.70 Section 3 is primarily used by national banks and the --- ederal government. Rather, it is section 4—which describes exemption transactions—that would be the key exemption --- or the vast majority o --- startups and small businesses.71 1. Section 3(b) When the Securities Act was originally promulgated by the Seventy- Third Congress on May 27, 1933, it exempted several speci --- ic classes o --- securities in section 3(a).72 These exemptions generally do not apply to startup companies, but Congress also granted the SEC permission to exempt additional classes. Section 3(b) originally said: The commission may --- rom time to time by its rules and regulations, and subject to such terms and conditions as may be prescribed therein, add any class o --- securities to the securities exempted as provided in this section, i --- it --- inds that the en --- orcement o --- this title with respect to such securities is not necessary in the public interest and --- or the protection o --- investors by reason o --- the small amount involved or the limited character o --- the public o --- --- ering; but no issue o --- securities shall be exempted under this subsection where the aggregate amount at which such issue is o --- --- ered to the public exceeds $100,000.73 Also known as the “Small Issue Exemption,” section 3(b) was subsequently amended several times to increase the maximum o --- --- ering amount.74 Under the current version o --- the statute, the maximum o --- --- ering that can quali --- y under section 3(b) is $5,000,000.75 Four aspects o --- this provision are noteworthy. First, this exemption 69. See id. (This, o --- course, raises the question o --- who is the “reasonable shareholder” envisioned by the Securities Act? It is not necessary to resolve this question --- or the present purposes o --- this Article, but it is worth mentioning that while there are quite a --- ew very good articles on that subject, there are none that address who the reasonable shareholder in social media investing is. The author o --- this Article plans to address that gap in the literature in --- uture work.). 70. See generally Securities Act o --- 1933, § 3 (detailing the exempt securities). 71. See generally § 5 (detailing exemption transactions). 72. Securities Act o --- 1933 § 3(a). 73. § 3(b). 74. See, e.g., An Act to amend the Securities Investor Protection Act o --- 1970, Pub L. No. 95– 283, §18, 92 Stat. 275 (1978) (increasing the maximum o --- --- ering amount --- rom $500,000 to $1,500,000). 75. 15 U.S.C. § 77c(b)(1) (“No issue o --- securities shall be exempted under [small issues exemptive authority] where the aggregate amount at which such issue is o --- --- ered to the public exceeds $5,00,000.”). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 31 applies to the securities themselves, not the transaction. This means that securities issued under this provision could be resold in another transaction because the exemption attaches to the security. This resale exemption is presently o --- little consequence, however, because the SEC has speci --- ically ruled that its permissive exemptions under 3(b) are subject to resale restrictions.76 Yet it appears this resale restriction is not required by the statute. Second, this exemption is permissive, whereby the SEC may create a rule or regulation.77 This distinguishes the 3(b)(1) --- rom the 4(a)(2) exemption described below, as the latter provides that certain transactions are exempt --- rom the Securities Act as a matter o --- statutory law. Third, the Small Issue Exemption is limited to a dollar amount that is speci --- ied by Congress as a matter o --- statutory law. While the SEC can set a lower limit, it does not have the authority to set a higher limit --- or exempt securities under this section. Fourth, the section 3(b)(1) exemption contemplates a “limited character o --- the public o --- --- ering.”78 This is nebulous on two dimensions, as the terms “limited character” and “public o --- --- ering” are both unclear. It would seem, however, that section 3(b)(1) provides room --- or a broader 76. See 17 C.F.R. § 230.502(d) (2019) (“Except as provided in § 230.504(b)(1), securities acquired in a transaction under Regulation D shall have the status o --- securities acquired in a transaction under section 4(a)(2) o --- the Act and cannot be resold without registration under the Act or an exemption there --- rom.”). See also 17 C.F.R. § 230.504(b)(1) (2019). General conditions. To quali --- y --- or exemption under this § 230.504, o --- --- ers and sales must satis --- y the terms and conditions o --- §§ 230.501 and 230.502(a), (c) and (d), except that the provisions o --- § 230.502(c) and (d) will not apply to o --- --- ers and sales o --- securities under this § 230.504 that are made: (i) Exclusively in one or more states that provide --- or the registration o --- the securities, and require the public --- iling and delivery to investors o --- a substantive disclosure document be --- ore sale, and are made in accordance with those state provisions; (ii) In one or more states that have no provision --- or the registration o --- the securities or the public --- iling or delivery o --- a disclosure document be --- ore sale, i --- the securities have been registered in at least one state that provides --- or such registration, public --- iling and delivery be --- ore sale, o --- --- ers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered be --- ore sale to all purchasers (including those in the states that have no such procedure); or (iii) Exclusively according to state law exemptions --- rom registration that permit general solicitation and general advertising so long as sales are made only to “accredited investors” as de --- ined in § 230.501(a). 77. See Securities Act o --- 1933, ch. 38, § 3(b)(1), 48 Stat. 74 (codi --- ied as amended at 15 U.S.C. §§ 77a-77aa). (“The Commission may --- rom time to time by its rules and regulations, and subject to such terms and conditions as may be prescribed therein, add any class o --- securities to the securities exempted as provided in this section, i --- it --- inds that the en --- orcement o --- this subchapter with respect to such securities is not necessary in the public interest and --- or the protection o --- investors by reason o --- the small amount involved or the limited character o --- the public o --- --- ering . . . .”) (emphasis added). 78. Id. Electronic copy available at: https://ssrn.com/abstract=3548312 32 Loyola University Chicago Law Journal [Vol. 52 reading o --- “public o --- --- ering” than section 4(a)(2), which only pertains to transactions “not involving a public o --- --- ering.”79 This last point merits emphasis. I --- one is to --- ollow the common rules o --- statutory construction that similar terms should be interpreted in a similar way and di --- --- erent terms should be interpreted in a di --- --- erent way,80 then this di --- --- erence in language indicates a di --- --- erence in meaning. It logically --- ollows that “limited public o --- --- ering” and “not . . . a public o --- --- ering” are distinguishable. Moreover, “limited” seems to indicate a broader scope o --- permitted activity than “not” or none. There --- ore, 3(b)(1) should be interpreted to be more permissive than 4(a)(2) with regard to public o --- --- erings. Thus, the o --- --- er and sale on social media o --- securities exempted under section 3(b)(1) may be less likely to violate the securities laws than a similar o --- --- er and sale o --- securities in a transaction exempted under section 4(a)(2). 2. Section 4(a)(2) The original version o --- the Securities Act provided in section 4(1) the prohibitions o --- the Securities Act “[s]hall not apply to . . . transactions by an issuer not with or through an underwriter and not involving any public o --- --- ering.”81 Now --- ound in section 4(a)(2), the current version o --- the Securities Act, as amended, provides that “[t]he provisions o --- section 5 [prohibitions relating to interstate commerce and the mails] shall not apply to transactions by an issuer not involving any public o --- --- ering.”82 It is important to note that a “public o --- --- ering” disquali --- ies an issuance o --- stock --- rom exemption under section 4(a)(2). This brings up yet another question: what is a “public o --- --- ering”? The SEC --- irst attempted to answer this question on January 24, 1935, when it published an opinion letter outlining --- our --- actors that would be considered in determining whether a public o --- --- ering is involved in a given transaction: (1) the number o --- o --- --- erees and their relationship to each other and to the issuer; (2) the number o --- units o --- --- ered; (3) the size o --- the o --- --- ering; and (4) the manner o --- the o --- --- ering.83 Un --- ortunately, this multi --- actor test did little to provide the clarity and certainty needed --- or unregistered o --- --- erings. Rather, it provided as many 79. § 4(a)(2). 80. See William N. Eskridge, Jr. & Philip P. Frickey, The Supreme Court 1993 Term Foreword: Law as Equilibrium, 108 HARV. L. REV. 26, 99, 105 (1994) (provides the Rehnquist court’s canons o --- statutory construction). 81. Securities Act o --- 1933, ch. 38, § 4(1), 48 Stat. 74 (codi --- ied as amended at 15 U.S.C. §§ 77a– 77aa). 82. § 4(a)(2). 83. Letter o --- Gen. Counsel Discussing Factors to be Considered in Determining the Availability o --- the Exemption --- rom Registration Provided by the Second Clause o --- Section 4(1), Securities Act Release No. 285, 1935 WL 27785 (Jan. 24, 1935). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 33 new questions as it did answers. For instance, how many units can be o --- --- ered be --- ore an o --- --- ering becomes public? The SEC --- irst attempted to clari --- y the statue by ruling that the Securities Act only applied when a “substantial number” o --- securities was o --- --- ered to the public.84 What, precisely, is a “substantial number”? This question does not even bear --- urther consideration, given that in 1953, the Supreme Court expressly held that “there is no warrant --- or superimposing a quantity limit on private o --- --- erings as a matter o --- statutory interpretation.”85 SEC v. Ralston Purina Co.86 is a --- oundational case in securities law because it was the --- irst time that the Supreme Court attempted to de --- ine a public o --- --- ering. Ralston Purina, a Missouri-based manu --- acturer o --- animal --- eed and pet --- ood, o --- --- ered shares o --- its stock to a number o --- its “key employees.”87 The corporation made no e --- --- ort to register this transaction under the Securities Act o --- 1933, and the key employees were not given access to the kind o --- in --- ormation which registration under the Act. The corporation argued that o --- --- ering to a limited group (such as key employees or even all employees) could not properly be characterized as a public o --- --- ering. The Supreme Court rejected this argument. It --- ound that employees are members o --- the investing public and are thereby entitled to the same protections under the Securities Act.88 The Court conceded that some employees, such as high-level executives, might have access to the same kind o --- in --- ormation that would be required by a registration. I --- the o --- --- ering was con --- ined to such high-level executives, then perhaps that would not be a public o --- --- ering. But this is dicta. The critical holding --- rom Ralston Purina is that an o --- --- ering that is not open to everyone may nevertheless be public in character. Whether an o --- --- ering is “public” and “private” requires a --- act-speci --- ic inquiry into the circumstances under which the distinction is sought to be established, and to consider the purposes sought to be achieved by such distinction.89 84. Securities Act Release No. 97, 1933 WL 28905 at *3 (Dec. 28, 1933) (“It seems clear that o --- --- erings addressed only to security holders o --- a single issuer may nevertheless be ‘public o --- --- erings’ within the meaning o --- Section 4(1) . . . . I --- the group o --- security holders includes a substantial number o --- persons, the o --- --- ering should be considered a ‘public’ one.”); See also Securities Act Release No. 285, at *1 (holding that twenty- --- ive persons was not a “substantial number”). 85. SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1953) (discussing when to investigate particular exemption claims). 86. Id. at 120. 87. Id. (discussing that a “key employee” is within this exemption). 88. Id. at 126–27 (holding that Provision o --- Securities Act, exempting --- rom registration requirements transactions by an issuer not involving any public o --- --- ering, was not intended to deprive employees as a class o --- the sa --- eguards o --- the Provision o --- Securities Act). 89. Id. at 124 (citing 102 F. Supp. at 968, 969). Electronic copy available at: https://ssrn.com/abstract=3548312 34 Loyola University Chicago Law Journal [Vol. 52 Ralston Purina provided two requirements --- or an o --- --- ering to be characterized as private. First, all o --- --- erees must have access to the types o --- in --- ormation that would be disclosed in a registration; and, second, the o --- --- erees must be capable o --- --- ending --- or themselves.90 The second requirement has developed into the “sophisticated investor” standard, which includes an assessment o --- o --- --- erees’ ability to demand and understand the in --- ormation that is available to them.91 In other words, the Court --- ound that access to in --- ormation is a necessary but not a su --- --- icient condition to --- ind that the investor is able to --- end --- or onesel --- .92 The Court explained that the number o --- purchasers involved is not dispositive, but the number o --- o --- --- erees and purchases is a relevant --- actor in determining whether an o --- --- ering is private.93 The size o --- the o --- --- ering is also relevant to this determination. Both the number o --- shares o --- stock o --- --- ering and the aggregate o --- --- erings price o --- the transaction help show whether an o --- --- ering is public or private.94 In summary, Ralston Purina held that whether an o --- --- ering is public or private shall be based on (1) the number o --- o --- --- erees, (2) the o --- --- erees’ need --- or in --- ormation, (3) the o --- --- erees’ access to in --- ormation, and (4) the size o --- the o --- --- ering—both in terms o --- the number o --- securities o --- --- ered and the aggregate o --- --- ering price.95 The SEC again tried to clari --- y the concept o --- “public o --- --- ering” in 1974 by adopting Rule 146.96 A --- ter its adoption, then-SEC Chairman William J. Casey proudly remarked, “[a] --- ter 40 years o --- mystery and uncertainty, we published this week standards on how companies can raise money in a private o --- --- ering,”97 and --- urther promised to “provide more objective 90. Id. at 124–25 (re --- erencing Thomas Lee Hazen, § 4:88. Exemption --- or Issuer Transactions Not Involving a Public O --- --- ering (“The Private Placement Exemption”)—Section 4(a)(2)—Scope o --- the Section 4(a)(2) Exemption, 1 LAW SEC. REG. § 4:88 (2020)). 91. Id. (discussing how the design o --- the statute is to protect investors by promoting --- ull disclosure o --- in --- ormation necessary --- or investors to make in --- ormed investment decisions). 92. Id. at 124–127 (discussing other necessary skills and knowledge needed --- or investors). 93. Ralston Purina, 346 U.S. at 125. 94. Id. at 122, n. 6 (explaining the sale o --- stockholders that are small in numbers does not constitute a public o --- --- ering). 95. Hazen, supra note 90 (providing --- actors to determine whether an o --- --- ering is public or private). 96. See Noticed o --- Proposed Rule 146 Under the Securities Act o --- 1933 – “Transactions by an Issuer Deemed Not to Involve Any Public O --- --- ering and Related Form 146” and Notice o --- a Proposal to Amend Rule 257 Under Such Act – “O --- --- erings Not in Excess o --- $50,000”, Securities Act Release No. 5336, 1972 WL 121503 (Nov. 28, 1972) (providing more objective standards --- or determining a public o --- --- ering). 97. SEC News Release, Remarks by William J. Casey, Chairman, SEC, Regulation and the Structure o --- the Securities Market (Nov. 30, 1972); Gregory DuBois Erwin, Goodbye Private Placement, Hello 146 – Recent Appellate Court Decisions Suggest that Investment Bankers Should No Longer Rely on the Private Placement Exemption, 6 CREIGHTON L. REV. 127, 127 (1972) (emphasizing the uncertainty as to what constitutes a private o --- --- ering). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 35 standards --- or determining when the o --- --- er or sale o --- securities by an issuer is a transaction not involving a public o --- --- ering.”98 While Rule 146 was clear and quantitative inso --- ar as limiting the number o --- purchasers to thirty- --- ive, it su --- --- ered --- rom numerous ambiguities pertaining to general solicitation. For example, Rule 146 provided that the o --- --- er must be made to an investment representative that “has such knowledge and experience in --- inancial and business matters that he alone, or together with other o --- --- eree representatives or the o --- --- eree, is capable o --- evaluating the merits and risks o --- the proposed investment.”99 This e --- --- ectively restates the “sophisticated investor” requirement without clari --- ying what that means. Others have noted that “this is a very imprecise standard, and courts have, predictably, di --- --- ered in their interpretations o --- it.”100 As it turned out, Rule 146 was so vague as to be essentially useless, and it has been relegated to the voluminous dustbin o --- securities law history. The SEC tried yet again—and perhaps --- inally succeeded—in 1982 with its adoption o --- Regulation D.101 A --- --- ectionately called “Reg D,” this regulation created reasonably clear ways --- or o --- --- erings to be exempt --- rom registration under the Securities Act.102 Indeed, this regulation paved the way --- or the venture capital industry to succeed in America. C. Regulation D When Regulation D was promulgated on April 15, 1982, it comprised six rules, Rules 501–506.103 The --- irst three rules set --- orth general terms and conditions: Rule 501 de --- ines “accredited investor,” “insiders,” “natural persons,” “purchaser representative,” and other key terms; Rule 502 sets --- orth the disclosure requirements (which are minimal) and 98. Transactions By an Issuer Deemed not to Involve Any Public O --- --- ering, Securities Act Release No. 5487, 39 Fed. Reg. 15,261 (May 2, 1974) (discussing objective standard to determine what would not be deemed a public o --- --- ering). 99. Securities Act Release No. 5487, 39 Fed. Reg. at 15,263 (SEC Rule 146(a)(1)(i)) (discussing the knowledge and expertise needed to be capable o --- evaluating proposed investments). 100. H. David Heumann, Is SEC Rule 146 Too Subjective to Provide the Needed Predictability in Private O --- --- erings?, 55 NEB. L. REV. 1, 7 (1975) (discussing the imprecise standard o --- investment sophistication). 101. See 17 C.F.R. § 230.501 et seq. (2019) (explaining the sections and terms used in Regulation D). 102. Id. See also Regulation D O --- --- erings, SEC, https://www.sec.gov/ --- ast-answers/answers- regdhtm.html [https://perma.cc/U5VV-GMEF] (Nov. 27, 2017) (explaining how companies can become exempt --- rom registration requirements under Regulation D). 103. See Revision o --- Certain Exemptions --- rom Transactions Involving Limited O --- --- ers and Sales, Securities Act Release No. 6389, 24 SEC. Docket 1166, 1982 WL 35662, at *2 (Mar. 8, 1982) (“Rules 501-506, that establishes three exemptions --- rom the registration requirements o --- the Securities Act and replaces exemptions that currently exist under Rules 146, 240, and 242.”); Interpretive Release on Regulation D, Securities Act Release No. 6455, 1983 WL 409415 (Mar. 3, 1983). Electronic copy available at: https://ssrn.com/abstract=3548312 36 Loyola University Chicago Law Journal [Vol. 52 establishes other terms o --- the o --- --- ering; and Rule 503 requires the issuer to --- ile a notice o --- sale on Form D.104 Additionally, Rule 502(c) prohibits the issuer --- rom any --- orm o --- general solicitation or general advertising.105 The SEC provided an interpretive release on Regulation D that attempts to de --- ine “general solicitation”: In analyzing what constitutes a general solicitation, the sta --- --- considered a solicitation by the general partner o --- a limited partnership to limited partners in other active programs sponsored by the same general partner. In determining that this did not constitute a general solicitation, the Division underscored the existence and substance o --- the preexisting business relationship between the general partner and those being solicited. The general partner represented that it believed each o --- the solicitees had such knowledge and experience in --- inancial and business matters that he or she was capable o --- evaluating the merits and risks o --- the prospective investment . . . . In analyzing whether an issuer was using a general advertisement to o --- --- er or sell securities, the sta --- --- declined to express an opinion on a proposed tombstone advertisement that would announce the completion o --- an o --- --- ering . . . . Because the requesting letter did not describe the proposed use o --- the tombstone announcement, and because the announcement o --- the completion o --- one o --- --- ering could be an indirect solicitation --- or a new o --- --- ering, the sta --- --- did not express a view. In a letter regarding Tax Investment In --- ormation Corporation dated January 7, 1983, the sta --- --- considered whether the publication o --- a circular analyzing private placement o --- --- erings, where the publisher was independent --- rom the issuers and the o --- --- erings being analyzed, would violate Rule 502(c). Although Regulation D does not directly prohibit such a third-party publication, the sta --- --- re --- used to agree that such a publication would be permitted under Regulation D because o --- its susceptibility to use by participants in an o --- --- ering. Finally, in the letter re Aspen Grove dated November 8, 1982 the sta --- --- expressed the view that the proposed distribution o --- a promotional brochure to the members o --- the “Thoroughbred Owners and Breeders Association” and at an annual sale --- or horse owners and the proposed use o --- a magazine advertisement --- or an o --- --- ering o --- interests in a limited partnership would not comply with Rule 502(c).106 As the above discussion makes clear, the ban on general solicitation was murky and contested right --- rom its start. It is even harder to relate the SEC’s guidance on general solicitation to the use o --- social media 104. See Securities Act Release No. 6455, 1938 WL 409415, at *1 (Mar. 3, 1938) (“[Rules 501- 503] set --- orth general terms and conditions that apply in whole or in part to the exemptions.”). 105. Id. (“Rule 502(c) prohibits the issuer or any person acting on the issuer’s behal --- --- rom o --- --- ering or selling securities by any --- orm o --- general solicitation or general advertising.”). 106. Interpretive Release on Regulation D, Securities Act Release No. 6455, 1983 WL 409415 (Mar. 3, 1983) (internal citations omitted) (quoting “Manner o --- O --- --- ering – Rule 502(c)”). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 37 today. While the ban on general solicitation has been li --- ted with regard to o --- --- erings made solely to accredited investors, it remains in e --- --- ect --- or o --- --- erings to ordinary investors. Such o --- --- erings can be vital to early stage startups who raise most o --- their seed money --- rom --- riends and --- amily.107 Accordingly, the exemptions that permit sale to ordinary investors—Rule 504 and Rule 506(b)—remain highly relevant and require --- urther analysis. Both o --- these exemptions are conditional on meeting the requirement o --- Rule 502(c), which limits the manner o --- o --- --- ering and bans general solicitation.108 1. Rule 502(c) Rule 502(c) bans general solicitation and de --- ines it as “including, but not limited to, the --- ollowing: (1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and (2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.”109 The ban on general solicitation --- ocuses on the quality, rather than the quantity, o --- potential investors. In other words, general solicitation may be prohibited even i --- relatively --- ew potential investors are contacted i --- the investors lack sophistication, wealth, or experience in the industry. On the other hand, general solicitation o --- a relatively large group o --- potential investors may not be prohibited i --- those investors meet the quali --- ication requirements --- or that o --- --- ering. In order to constitute a general solicitation, promoters and issuers o --- the o --- --- ering must not have a prior relationship with the o --- --- eree. Underwriters are o --- ten used to ensure that the o --- --- erees meet the necessary requirements or have made prior deals with issuers. Mass mailings, along with targeted mailings through the purchase o --- mailing lists, are typical examples o --- general solicitations. Further, the construction o --- any mailing list will constitute general solicitation unless the potential investors on the mailing list have been properly vetted prior to its --- ormulation.110 It is clear that use o --- electronic media can constitute a general solicitation but limiting access to such media can comply with the no- 107. See Types o --- Investors, FUNDABLE, https://www. --- undable.com/learn/ resources/guides/investor/types-o --- -investors [https://perma.cc/24VK-2CPH] (last visited May 24, 2020) (calculating $60 billion o --- --- unding --- or startups comes --- rom --- amily and --- riends in the aggregate each year in the United States whereas $20 billion comes --- rom angel investors, $22 billion --- rom venture capitalists, and $2.8 billion --- rom actual customers). 108. See 17 C.F.R. § 230.502(c) (2020) (noting the limitations on the manner o --- an o --- --- ering). 109. Id. (providing the de --- inition --- or general solicitation). 110. Thomas Lee Hazen, § 4:77. Regulation D—Limitations on General Solicitation in Regulation D O --- --- erings, 1 LAW SEC. REG. § 4:77 (2020) (explaining how the construction o --- a mailing list constitute general solicitation). Electronic copy available at: https://ssrn.com/abstract=3548312 38 Loyola University Chicago Law Journal [Vol. 52 general-solicitation provision on Rule 502(c). For example, in the early days o --- the internet, the SEC stated that “the placing o --- the o --- --- ering materials on the Internet would not be consistent with the prohibition against general solicitation or advertising in Rule 502(c) o --- Regulation D.”111 However, the SEC has since taken a more nuanced view toward internet materials. In 1996, the SEC issued a no-action letter regarding IPOnet, approving the use o --- a password-protected website --- or private placements, provided that investors could only access the in --- ormation a --- ter they had been quali --- ied as “sophisticated.”112 Subsequent SEC guidance con --- irmed its position that providing investment in --- ormation on a password-protected web site does not amount to a general solicitation.113 It is not clear whether and how the use o --- social media alone is captured in this de --- inition. The SEC has issued little guidance as to this issue, and case law provides --- ew clues. In their administrative proceeding against Prescient Capital Partners, Ltd. (PCP), the SEC --- ound as a matter o --- --- act that PCP used mail, email, social media, internet websites, and video to generally solicit investors.114 This implies that the SEC believes social media can constitute a general solicitation. Un --- ortunately, the SEC does not describe the particular behavior on social media that constituted the solicitation. The SEC’s cease-and-desist letter simply orders PCP “[to] cease and desist --- rom committing or causing any violations and any --- uture violations o --- Sections 5(a) and (c) o --- the Securities Act” (and pay --- ines).115 Issuers have almost no evidence on whether the SEC will 111. Use o --- Electronic Media --- or Delivery Purposes, Securities Act Release No. 7233 (Oct. 6, 1995) (discussing inconsistencies in the placement o --- o --- --- ering materials on the Internet with the prohibition against general solicitations or advertising). 112. IPOnet, SEC No-Action Letter, 1996 WL 431821, at *1 (July 26, 1996) (noting that investors could only access the in --- ormation a --- ter being deemed “sophisticated”). 113. See John C. Co --- --- ee Jr., Brave New World?: The Impact(s) o --- the Internet on Modern Securities Regulation, 52 BUS. LAW. 1195, 1221 (1997) (“Taken together, these three no-action letters both establish the concept that a password-protected Web site does not amount to a ‘general solicitation’ or ‘general advertising’ in violation o --- Rule 502. . . . ”) (citing IPOnet, SEC No-Action Letter, 1996 SEC No-Act. LEXIS 642 (July 26, 1996); Angel Capital Electronic Network, SEC No-Action Letter, 1996 SEC No-Act. LEXIS 812 (Oct. 25, 1996); Lamp Technologies, Inc., SEC No Action Letter, 1997 SEC No-Act. LEXIS 638 (May 29, 1997)). 114. In the Matter o --- Prescient Capital Partners, Exchange Act Release No. 9363 (Sept. 24, 2012), https://www.sec.gov/litigation/admin/2012/33-9363.pd --- [https://perma.cc/E2LW-J833] (“During the relevant period, Respondents made general solicitations o --- investors by means o --- mail, email, social media, and Internet websites and videos. These solicitations were prohibited by Rules 506(b)(1) and 502(c) o --- Regulation D.”). Yet this does not make clear whether the social media solicitations alone would have been enough to violate the rules. Moreover, the --- act- --- inding is obviously conclusory, as it provides no analysis as to whether social media is itsel --- a general solicitation. 115. Id. (providing SEC orders pursuant to Section 8A o --- the Securities Act). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 39 declare a social media behavior to be a general solicitation. Legal, socially valuable behavior may thereby be chilled needlessly. 2. Rule 504 When Rule 504 was --- irst promulgated in 1982, it permitted the o --- --- er and sale o --- up to $500,000 in securities.116 This limitation is statutorily required because Rule 504 is permitted under section 3(b) o --- the Securities Act, and section 3(b) expressly limits the SEC’s authority --- or such permissive exemptions to speci --- ic dollar amounts.117 That amount has been amended, however, and now it is presently $5 million.118 Rule 504 used to be relatively useless, but it was modi --- ied on October 26, 2016 in meaning --- ul ways that made this exemption potentially quite use --- ul.119 As amended, Rule 504 now allows an o --- --- ering o --- up to $5 million to an unlimited number o --- investors, whether accredited or not.120 In addition, Rule 504 appears to permit limited public solicitation o --- investors.121 While general solicitation is not permitted under Rule 504, the notion o --- a limited public solicitation makes this rule potentially quite power --- ul --- or social media investing. Regulation D Rule 504 could be used to solicit investors --- or corporate --- inancing on social media because it sidesteps the general solicitation ban. The leading treating on securities regulation states, “[a] general solicitation can be used --- or a Rule 504 o --- --- ering i --- the transaction is registered under a state securities law that requires public --- iling and delivery o --- a substantive disclosure document.”122 In other words, Rule 504’s power is limited, however, because compliance with this --- ederal regulation does not preempt state securities regulations. Accordingly, a 116. See 17 C.F.R. § 230.504 (1984) (addressing the original limitation on o --- --- ering price). 117. See Securities Act o --- 1933, ch. 38, § 3(b), 48 Stat. 74 (codi --- ied as amended at 15 U.S.C. §§ 77a-77aa); 17 C.F.R. § 230.504(a)(3) (2019) (noting the additional exemptions limiting the SEC's authority). 118. See 17 C.F.R. § 230.504(a)(3) (2019) (noting the amended amount exempt under section 3(b) o --- the Act). 119. See Exemptions to Facilitate Intrastate and Regional Securities O --- --- erings, 81 Fed. Reg. 83,550, 2016 WL 6822600 (Nov. 21, 2016) (to be codi --- ied as 17 C.F.R. § 230.147, 230.147A) ("We also are adopting amendments to Rule 504 o --- Regulation D under the Securities Act to --- acilitate issuers' capital raising e --- --- orts and provide additional investor protections."); see also SEC Adopts Final Rules to Facilitate Intrastate and Regional Securities O --- --- erings, SEC (Oct. 26, 2016), https://www.sec.gov/news/pressrelease/2016-226.html [https://perma.cc/NL3K-4EAS] (explaining the amendments to Rule 504). 120. Exemptions to Facilitate Intrastate and Regional Securities O --- --- erings, 81 Fed. Reg. at 83,512 (discussing the allowance o --- a $5 million o --- --- ering). 121. See id. (“Rule 504 imposes certain conditions, including limitations on the use o --- general solicitation or general advertising in the o --- --- ering and the restricted status o --- securities issued pursuant to the exemption. . . .”). 122. Hazen, supra note 110. Electronic copy available at: https://ssrn.com/abstract=3548312 40 Loyola University Chicago Law Journal [Vol. 52 Rule 504 issuer under present law will also have to --- ind an exemption --- or every state in which a purchaser resides. Causing Rule 504 to preempt state securities regulation (also known as “blue sky laws”) may be the killer --- eature necessary to make this exemption a power --- ul way --- or startup entrepreneurs to raise their --- irst round o --- capital via social media. However, even without that change to the rules, Rule 504 is still marginally use --- ul, as many states have an exemption --- or o --- --- erings to a limited number o --- purchasers when no general solicitation is involved, and a --- ew states provide a state securities regulation exemption --- or issuances that otherwise comply with Rule 504. Rule 504’s power was --- urther limited by its low --- undraising limit, which was originally $500,000. Considering that the average venture capital investment into a startup company is $20.4M,123 Rule 504 did not provide a viable alternative means o --- --- inancing a startup. But the JOBS Act updated Rule 504 and increased its limit ten --- old. Startups can now raise up to $5 million via this previously underutilized provision. Given the newly enhanced power o --- Rule 504, it is more important than ever to understand whether social media posting constitutes a “limited public o --- --- ering” or a “general solicitation.” For example, Karen might be able to use social media to solicit investment in her startup thanks to Rule 504. South Dakota securities regulations provide an exemption to state registration --- or transactions that are exempt under the Securities Act o --- 1933.124 I --- Karen has con --- idence about her ability to solicit investment in her new business to her --- riends --- rom the Beacom School o --- Business via their Facebook group,125 she might leverage social media to level the playing --- ields between hersel --- and more well- connected entrepreneurs. 123. NVCA 2020 YEARBOOK, NAT’L VENTURE CAPITAL ASS’N 32 (Mar. 2020), https://nvca.org/wp-content/uploads/2020/04/NVCA-2020-Yearbook.pd --- [https://perma.cc/U7HH-4N2Q] (providing the average venture capital investment into a startup company). 124. See S.D. CODIFIED LAWS § 47-31B-202 (2020) (permitting certain transactions to be exempt --- rom registration under the Securities Act o --- 1933 i --- : (17) An o --- --- er to sell, but not a sale, o --- a security exempt --- rom registration under the Securities Act o --- 1933 i --- : (A) A registration statement has been --- iled under this chapter, but is not e --- --- ective; (B) A solicitation o --- interest is provided in a record to o --- --- erees in compliance with a rule adopted by the director under this chapter; and (C) A stop order o --- which the o --- --- eror is aware has not been issued by the director under this chapter and an audit, inspection, or proceeding that may culminate in a stop order is not known by the o --- --- eror to be pending.). 125. USD Beacom School o --- Business Class o --- 2022, FACEBOOK, https://www. --- acebook.com/groups/158389894785138/ [https://perma.cc/46SX-S578] (last visited July 28, 2020). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 41 3. Rule 506 Originally, section 4(1) o --- the Securities Act o --- 1933 stated that the provisions o --- section 5 would not apply to “transactions by any issuer not with or through an underwriter and not involving any public o --- --- ering.”126 The Securities Act has been amended since its inception and now it is section 4(a)(2) that declaims: issuers o --- securities are not required to register their transactions as long as they do not involve “any public o --- --- ering.”127 As mentioned earlier, the SEC adopted Regulation D in 1982 as the “next logical step in the movement toward providing objective ‘sa --- e harbor’ standards --- or, and clari --- ying the interrelationship o --- , the elements o --- the private and limited o --- --- ering exemptions.”128 Purchasers receive “‘restricted securities’ through Rule 506 transactions that cannot be sold --- or a minimum o --- six months or a year without registering them.”129 Until 1996, issuers seeking an exemption under --- ederal securities regulations via Regulation D, i --- granted, were historically not protected --- rom individual states’ blue sky laws. For --- ourteen years, privately --- unded companies were required to comply with --- ederal and state securities laws when attempting to raise capital in the United States. Congress addressed this disparate impact with the National Securities Markets Improvement Act (NSMIA), amending section 18 o --- the Securities Act to preempt state securities laws.130 The NSMIA states: “no law, rule, regulation, or order, or other administrative action o --- any State or any political subdivision thereo --- . . . shall directly or indirectly apply to a . . . covered security.”131 Section 18(b)(4)(D) stipulates that “a security is a ‘covered security’ with respect to a transaction that is exempt --- rom registration pursuant to commission rules or regulations issued under § 4(2) o --- the Securities Act o --- 1933.”132 There --- ore, as long as an issuer meets the Rule 506 requirements in regard to “any public o --- --- ering,” that o --- --- ering will be exempt --- rom registration under --- ederal securities laws in addition to being 126. James M. Landis, Legislative History o --- the Securities Act o --- 1933, 28 GEO. WASH. L. REV. 29, 41 (1959) (discussing transactions section 5 provisions would not apply to). 127. 17 C.F.R. § 230.506(b) (2019) (noting under what circumstances issuers o --- securities are not required to register their transactions). 128. Theodore Parnall, Bruce R. Kohl & Curtis W. Hu --- --- , Private and Limited O --- --- erings A --- ter a Decade o --- Experimentation: The Evolution o --- Regulation D, 12 N.M. L. REV. 633, 634 (1982) (discussing SEC adoption o --- Regulation D). 129. Fast Answers: Rule 506 o --- Regulation D, SEC (Nov. 27, 2017), https://www.sec.gov/ --- ast- answers/answers-rule506htm.html [https://perma.cc/K828-9D3M] (providing when restricted securities may be sold). 130. See National Securities Markets Improvement Act o --- 1996, Pub. L. No. 104-290, Stat. 3416 (outlining the scope o --- exemptions --- rom state regulation o --- securities o --- --- erings). 131. Securities Act o --- 1933, § 18, ch. 38, 48 Stat. 74 (discussing covered securities). 132. Hamby v. Clearwater Consulting Concepts, LLP, 428 F. Supp. 2d 915, 918 (E.D. Ark. 2006); see also Securities Act o --- 1933, § 18(b)(4)(D) (providing said statute). Electronic copy available at: https://ssrn.com/abstract=3548312 42 Loyola University Chicago Law Journal [Vol. 52 exempt --- rom state regulations --- or being “covered securities.” The issuer will only be required to --- ile its Form D. a. Rule 506(b) Rule 506(b) is the most --- requently used exemption in securities regulation. Historically, over 99% o --- private placements were per --- ormed under Rule 506(b).133 It is not an overstatement, there --- ore, to suggest that the enactment o --- Rule 506(b) is a key reason --- or the growth and development o --- the venture capital industry in the United States. Indeed, venture capital --- irms deployed over $1.7 trillion in investment via Regulation D Rule 506(b) in 2017.134 With the ability to remain outside the regulatory authority o --- both --- ederal and state securities laws, it goes without saying that Rule 506 is an exceptionally power --- ul exemption. It currently allows an issuer to raise an unlimited amount o --- capital.135 And Rule 506 permits --- undraising --- rom an unlimited number o --- “accredited investors” and up to thirty- --- ive “other purchasers.”136 The caveat, however, is that issuers claiming the 506(b) exemption are not permitted to o --- --- er securities through any --- orm o --- general solicitation or advertising.137 b. Rule 506(c) When Title II o --- the JOBS Act took e --- --- ect on September 23, 2013, the general solicitation ban was li --- ted—at least with regard to accredited investors—and Rule 506(c) was born.138 Since its inception, over $2.5 trillion in capital has been raised via Rule 506(c).139 Rule 506(c) is the 133. Scott Bauguess, Rachita Gullapalli, & Vladimir Ivanov, Capital Raising in the U.S.: An Analysis o --- the Market --- or Unregistered Securities O --- --- erings, 2009–2017, DIVISION OF ECONOMIC AND RISK ANALYSIS (DERA) U.S. SEC, 2 (Aug. 2018), https://www.sec.gov/ --- iles/DERA%20white%20paper_Regulation%20D_082018.pd --- [https://perma.cc/ZGY2-PCAC] (discussing the --- requency o --- the Rule 506(b) exemption). 134. Id. at 16, tbl. 3. 135. 17 C.F.R. § 230.506 (2019) (providing an issuer may raise an unlimited amount o --- capital). 136. See Fast Answers: Rule 506 o --- Regulation D, supra note 129. (“The company may sell its securities to an unlimited number o --- ‘accredited investors’ and up to 35 other purchasers.”). 137. Id. (discussing what issuers are not permitted to o --- --- er when claiming the 506(b) exemption). 138. Tanya Prive, General Solicitation Ban Li --- ted Today - Three Things You Must Know About It, FORBES (Sept. 23, 2013), https://www. --- orbes.com/sites/tanyaprive/2013/09/23/general- solicitation-ban-li --- ted-today-three-things-you-must-about-it/#6333d107e --- a6 [https://perma.cc/JME3-U623] (discussing how the general solicitation ban was li --- ted, and implications o --- such a li --- t); see also Eliminating the Prohibition on General Solicitation and General Advertising in Certain O --- --- erings, SEC (July 10, 2013), https://www.sec.gov/news/press/2013/2013-124-item1.htm [https://perma.cc/9TL5-4NNL] (providing that Ford D contains a separate box --- or issuers to check so that they may claim the 506 exemption that would permit general solicitation). 139. Bauguess, Gullapalli & Ivanov, supra note 133 at 16, tbl. 3. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 43 product o --- the JOBS Act’s mandate --- or the removal o --- the general solicitation ban that historically, and presently, restricts Rule 506(b).140 Now, issuers may “broadly solicit and generally advertise an o --- --- ering,” so long as they “take reasonable steps” to veri --- y that all o --- the purchasers are accredited and comply with the other conditions set --- orth in Regulation D.141 D. Regulation Crowd --- unding In addition, recent regulatory changes have attempted to make other exemptions more power --- ul and especially use --- ul --- or nontraditional entrepreneurs who are not typical recipients o --- venture capital --- unding. Thanks to Title III o --- the JOBS Act o --- 2012, entrepreneurs could raise venture capital through equity crowd --- unding portals starting in 2015.142 In contrast to Regulation D o --- --- erings, however, “Reg CF” equity crowd --- unding campaigns raised a total o --- $75.8 million in 2018.143 The relatively small use o --- equity crowd --- unding results --- rom many --- actors, including the --- act that issuers must expend signi --- icant up- --- ront costs prior to listing.144 There is not yet a provision --- or permitting equity crowd --- unding investors to resell their securities, and this creates an impediment to purchasing them in the --- irst place.145 In addition, it is di --- --- icult to --- orm syndicates under Reg CF because the law does not permit investors to --- orm special purpose vehicles (SPVs) or special purpose entities (SPEs).146 These obstacles will have to be addressed i --- equity 140. See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, § 201, 126 Stat. 313–14 (2012) (“The Securities and Exchange Commission shall revise its rules issued in section 230.506 o --- title 17, Code o --- Federal Regulations, to provide that the prohibition against general solicitation or general advertising contained in section 230.502(c) o --- such title shall not apply to o --- --- ers and sales o --- securities made pursuant to section 230.506. . . .”). 141. General Solicitation – Rule 506(c), SEC, https://www.sec.gov/smallbusiness/ exempto --- --- erings/rule506c [https://perma.cc/XS4X-8PFD] (Mar. 12, 2020). 142. Press Release, SEC, SEC Adopts Rules to Permit Crowd --- unding (Oct. 30, 2015), https://www.sec.gov/news/pressrelease/2015-249.html [https://perma.cc/H5T8-32V7]. 143. Max Craw --- ord, Equity Crowd --- unding 2018 Review, START ENGINE INDEX (Jan. 14, 2019), https://www.startengine.com/blog/equity-crowd --- unding-2018-review/ [https://perma.cc/7VXN- CAXM]. 144. See Seth C. Oranburg, Bridge --- unding: Crowd --- unding and the Market --- or Entrepreneurial Finance, 25 CORNELL J.L. & PUB. POL’Y 397, 428 (2015) (discussing the many expenses issuers --- ace be --- ore being listed). 145. See Seth C. Oranburg, Democratizing Startups, 68 RUTGERS U.L. REV. 1013, 1015 (2016) (explaining how staying private would not accomplish the goals o --- the JOBS act because o --- the inability o --- new, smaller investors to resell). 146. The challenge presented by Reg CF’s restriction against SPVs has been recognized by members o --- Congress such as Patrick McHenry, Ranking Member o --- the Committee on Financial Services, who wrote a letter to that e --- --- ect to the SEC on October 15, 2019. Letter --- rom Patrick McHenry, Ranking Member, Comm. on Fin. Serv., to Vanessa Countryman, Secretary, SEC (Oct. 15, 2019), https://www.sec.gov/comments/s7-08-19/s70819-6293559-193383.pd --- Electronic copy available at: https://ssrn.com/abstract=3548312 44 Loyola University Chicago Law Journal [Vol. 52 crowd --- unding is to make a meaning --- ul impact on access to capital.147 Yet crowd --- unding has made one very important contribution to new venture --- inance: democratization. Research has shown that --- emale entrepreneurs receive a remarkably higher percentage o --- crowd --- unding dollars than venture capital dollars.148 Although equity crowd --- unding is in its in --- ancy, and studies on it are inherently preliminary, --- urther research may show that securities exemptions that permit general solicitation are more “democratic” in that entrepreneurs o --- all races, genders, and geographies have more equal access to capital --- ormation. E. Regulation A Title IV o --- the JOBS Act required the SEC to revise Regulation A in order to make larger amounts o --- capital available to medium-sized companies that could not a --- --- ord the process o --- registering with the SEC and going public in an initial public o --- --- ering (IPO).149 The revised rule is colloquially re --- erred to as “Reg A+” and has two o --- --- ering tiers with di --- --- erent requirements depending on the amount o --- --- unding raised.150 Tier 1 o --- --- erings are --- or --- undraisings up to $20 million.151 I --- the o --- --- eror stays under this limit --- or a twelve-month period, the o --- --- eror may sell stock to the general public.152 It does not limit the o --- --- ering to accredited investors only. Additionally, it permits the o --- --- eror to generally solicit the o --- --- ering to the public via a website such as the ports described below. However, Reg A Tier 1 o --- --- erings have a --- atal --- law: they do not o --- --- er preemption --- rom state blue sky laws. As a result, a Reg A+ Tier 1 issuer will have to comply with the blue sky laws in every state in which a purchaser resides. 147. Legislation has been proposed that would address some o --- these concerns; however, the Fix Crowd --- unding Act, H.R. 4855, has not seen action since its amended version passed the House on July 5, 2016. Fix Crowd --- unding Act, H.R. 4855, 114th Cong. (2016). 148. MARK GEIGER & SETH ORANBURG, RESEARCH REPORT PRESENTED AT BABSON COLLEGE, DO FEMALE INVESTORS SUPPORT FEMALE ENTREPRENEURS? AN EMPIRICAL ANALYSIS OF ANGEL INVESTOR BEHAVIOR, (2019) https://papers.ssrn.com/sol3/papers.c --- m?abstract_id=3429077 [https://perma.cc/9TPH-BVW9]. 149. See Securities Act o --- 1933, §§ 3, 4, 18, ch. 38, 48 stat. 74 (codi --- ied as amended at 15 U.S.C. §§ 77a–77aa); Pub. L. 112-106, 126 Stat 323–24, §§ 401–402 (2012); 17 C.F.R. §§ 230.251– 230.263 (2020) (detailing the SEC revisions made to Regulation A). 150. See 17 C.F.R. § 230.251 (2019) (setting out the two o --- --- ered tiers); see also Daniel Huang, Small Crowds Get Their Day in Investing Sun, WALL ST. J. (June 18, 2015), https://www.wsj.com/articles/small-crowds-get-their-day-in-investing-sun-1434655720 [https://perma.cc/JN4Q-8TFX (discussing the potential impact the new rules will have in democratizing how new entrepreneurs raise --- unds). 151. 17 C.F.R. § 230.251(a)(1) (2019); see also Regulation A, U.S. SEC. & EXCHANGE COMM’N, https://www.sec.gov/smallbusiness/exempto --- --- erings/rega [https://perma.cc/LM4R- CGZR] (last visited May 25, 2020) (summarizing the important points o --- Regulation A --- or small businesses). 152. 17 C.F.R. § 230.251(a)(1) (2019). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 45 This limitation is particularly problematic in a social media world. A key reason to use social media to solicit potential investors is to reach investors across the nation or even the world.153 Social media is as geographically unbounded as the internet itsel --- .154 But such an unbounded o --- --- ering would require the issuer to be prepared to comply with securities regulations in virtually every state. This greatly adds to the complexity o --- such an o --- --- ering. Indeed, the lack o --- blue sky preemption is o --- ten cited as the reason why the original Regulation A did not work.155 Reg A Tier 2, on the other hand, permits general solicitation to nonaccredited investors and provides preemption --- rom state blue sky laws.156 Blue sky law preemption is considered to be one o --- the most signi --- icant bene --- its o --- this exemption.157 In addition, it permits --- undraising up to $50 million --- rom nonaccredited investors.158 These are signi --- icant bene --- its that make Tier 2 o --- --- erings more attractive. Indeed, Reg D Tier 2 o --- --- erings are especially use --- ul as a “mini-IPO” through which companies can raise up to $50 million and thereby “test the waters” as to whether they would succeed in a --- ull-blown IPO. Tier 2 o --- --- erings also have signi --- icant additional costs. First, companies engaged in Tier 2 o --- --- erings must produce a detailed statement that includes two years o --- audited --- inancials.159 The company must wait --- or 153. See, e.g., Alejandro Cremades, How to Use Social Media to Pitch Investors, FORBES (Mar. 5, 2019, 9:55 AM), https://www. --- orbes.com/sites/alejandrocremades/2019/03/05/how-to-use- social-media-to-pitch-investors/#736466b11dd8 [https://perma.cc/B8QC-FAQC] (discussing ways in which startup entrepreneurs can utilize social media to connect with potential investors). 154. See, e.g., Esteban Ortiz-Ospina, The Rise o --- Social Media, OUR WORLD IN DATA (Sept. 18, 2019), https://ourworldindata.org/rise-o --- -social-media [https://perma.cc/8GUN-2ERU] (comparing the 3.5 billion people globally using social media o --- some --- orm with the 7.7. billion global population); Dave Cha --- --- ey, Global Social Media Research Summary 2020, SMART INSIGHTS (Aug. 3, 2020), https://www.smartinsights.com/social-media-marketing/social-media- strategy/new-global-social-media-research/ [https://perma.cc/W7M4-SEU4] (breaking down global social media usage by plat --- orm); Social Media Statistics and Facts, MARKETS.US, https://market.us/statistics/social-media/ [https://perma.cc/6U9W-C4YY] (Apr. 17, 2020) (comparing social media usage by global region). 155. See, e.g., Ruther --- ord B. Campbell Jr., Blue Sky Laws and the Recent Congressional Preemption Failure, 22 J. CORP. L. 175, 193–94 (1997) (discussing how state regulations undercut the use --- ulness o --- the original version o --- Regulation A). 156. 17 C.F.R. § 230.251 (2019); see John A. Aiello & Philip D. Forlenza, Regulation A Plus: A New Tool to Raise Capital, N.J. LAW. 11, 13 (2015) (“Tier 2 o --- --- erings are not subject to any type o --- state law review, and are --- ederally preempted under Regulation A Plus because a purchaser in a Tier 2 o --- --- ering is considered a quali --- ied purchaser.”); Amendments --- or Small and Additional Issues Exceptions under the Securities Act (Regulation A), Securities Act Release Nos. 33-9741; 34- 74578; 39-2501 (Mar. 25, 2015). 157. Christian W. Borek, Regulation A+: Navigating Equity-Based Crowd --- unding under Title IV o --- the JOBS Act, 47 CUMB. L. REV. 143, 168 (2016). 158. 17 C.F.R. § 230.255(a) (2019). 159. See 17 C.F.R. § 230.257(b)(2) (2019) (detailing the requirements that an issuer engaged in Tier 2 o --- --- erings needs to --- ile with the SEC). Electronic copy available at: https://ssrn.com/abstract=3548312 46 Loyola University Chicago Law Journal [Vol. 52 the SEC to review and comment on the o --- --- ering statement be --- ore making the stock o --- --- ering.160 A --- ter the stock o --- --- ering, Tier 2 companies continue to have reporting obligations; annual and semiannual reports must be posted to the SEC’s database, EDGAR, where anyone can view them.161 These costs and bene --- its make Tier 2 o --- --- erings more analogous to mini-IPOs than to upgraded Tier 1 o --- --- erings. Tier 1 o --- --- erings are themselves more like upgraded Rule 504 o --- --- erings, in that both o --- these allow sales o --- stock to nonaccredited investors on a --- ederal level but do not provide preemption --- rom state blue sky laws. Tier 2 o --- --- ers are like a downsized IPO. Both the IPO and the mini-IPO require periodic reporting and publication o --- risk --- actors and audited --- inancials on EDGAR, and both provide preemption --- rom state securities regulations. A Tier 2 issuer can even list on a stock public exchange like the NASDAQ or NYSE, so long as it complies with the requirements thereto under the Securities Exchange Act o --- 1934.162 Reg A Tier 2 has indeed --- ound its niche as a way --- or many pre-IPO companies to “test the waters” and determine whether they are good candidates --- or an IPO without investing the massive resources to go through the --- ull-blown IPO process.163 The proo --- o --- its utility is in the numbers. From July 19, 2015 (when the new rules governing Reg A came into e --- --- ect) to December 31, 2018, there were 115 companies who raised $1.27 billion via Tier 2.164 During that same time period, only 42 companies raised $230 million via Tier 1.165 F. Regulation S This Article’s scope is limited to securities regulation in the United States. However, it bears brie --- mention that as investing goes online, geographic boundaries begin to break down. This is especially true o --- cryptocurrency investments, which may not even be traceable by 160. Investor Alerts and Bulletins: Updated Investor Bulletin: Regulation A, SEC (May 24, 2019), https://www.sec.gov/oiea/investor-alerts-bulletins/ib_regulationa.html [https://perma.cc/772C-ST2K] (“For Tier 2 o --- --- erings, the o --- --- ering circular is subject to review and quali --- ication by the sta --- --- at the SEC, but is not subject to review by state securities regulators. Financial statements disclosed in a Tier 2 o --- --- ering must be audited by an independent accountant.”). 161. See 17 C.F.R. §§ 230.257(b)(1), 230.257(b)(3) (2019) (identi --- ying the obligations Tier 2 companies continue to have post-stock o --- --- ering); see also About EDGAR, SEC, https://www.sec.gov/edgar/about [https://perma.cc/9QVB-C2W9] (May 27, 2020) (summarizing the general purpose and operations o --- EDGAR as the SEC’s reporting system). 162. Bonnie J. Roe, Will Regulation A+ Find Its Niche? Some Opportunities to Explore, BUS. L. TODAY 1, 2 (2015). 163. Borek, supra note 157, at 164–66. 164. Rod Turner, These 107 Companies Raised $1.5 B via Regulation A+; New Metrics, MEDIUM (June 5, 2019), https://medium.com/@IamRodTurner/these-107-companies-raised-1-5- b-via-regulation-a-new-metrics-7b60ec41958b [https://perma.cc/B7JK-K5QP]. 165. Id. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 47 domestic securities regulators. Regulation S provides an exemption --- or companies to raise capital outside the United States.166 This “sa --- e harbor” applies where no o --- --- ering participant has engaged in any “directed selling e --- --- orts” in the United States.167 This Article regards the use o --- social media to solicit the sale o --- securities to U.S. persons. Whether or to what extent social media outreach could be made without any e --- --- ort toward or impact upon U.S. persons is beyond the scope o --- this Article. III. SOCIAL MEDIA INVESTMENT PLATFORMS The enactment o --- the JOBS Act and the resulting promulgations by the SEC o --- Rule 506(c), Reg A+, and Reg CF have given rise to a new type o --- social media plat --- orm: the social media investment plat --- orm. This part will explore the nature o --- these plat --- orms. At the outset, it is important to note that all the recently developed plat --- orms employ --- eatures --- or users such as groups, --- ollowing, likes, message boards, direct messaging, and other communication tools commonplace in standard social media applications. A. Angel Investment Portals Recall that Rule 506(c) requires “reasonable steps” to veri --- y that all the purchasers are accredited.168 Those reasonable steps may require an issuer to be more invasive with regard to determining an investor’s status. For example, the issuer may have to veri --- y the investor’s income or wealth by obtaining a copy o --- their tax --- ilings or bank statements.169 Perhaps because it is more e --- --- icient --- or investors to be scrutinized --- ewer times by a centralized authority, this new rule has led to the emergence o --- a new type o --- investment portal on the internet. Rule 506(c) “angel 166. 17 C.F.R. §§ 230.901–905 (2019). 167. 17 C.F.R. § 230.903 (2019). 168. See Fast Answers: Rule 506 o --- Regulation D, supra note 129 (summarizing Rule 506 o --- Regulation D --- or investors). 169. Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A O --- --- erings, SEC, https://www.sec.gov/in --- o/smallbus/secg/general-solicitation- small-entity-compliance-guide.htm [https://perma.cc/D7JU-Z5F6] (Sept. 20, 2013). Electronic copy available at: https://ssrn.com/abstract=3548312 48 Loyola University Chicago Law Journal [Vol. 52 investment” portals including AngelList,170 OurCrowd,171 Gust,172 and SeedInvest173 have emerged to service accredited investors who want to discover investment opportunities and invest online. Individuals issuing securities to companies via these plat --- orms do not have to veri --- y an investor’s accredited status because the portal has already done so on their behal --- .174 These portals generally o --- --- er --- eatures --- or users commonly used in standard social media applications.175 For example, on AngelList, you can “ --- ollow” investors including celebrities like Ashton Kutcher.176 In --- act, the “syndicated” nature o --- investment on AngelList is its most striking --- eature, as described in the next section. OurCrowd hosts live streaming web events so investors --- rom around the world can attend 170. Home Page, ANGELLIST, https://angel.co/ [https://perma.cc/XQ7T-X2XR] (last visited July 28, 2020). 171. “OurCrowd is a global crowd investing plat --- orm --- or accredited investors. It sources deals, per --- orms due diligence, and opens investments to its members, leading every investment with its own money. It takes an active stake in the companies it --- inances, through board seats and a mentorship program that pairs startups with OurCrowd contacts --- rom relevant industries.” As o --- September 2020, OurCrowd and its investor community have invested more than $112.50M --- or 100+ companies and --- unds. OurCrowd - Crunchbase Company Pro --- ile & Funding, CRUNCHBASE, https://www.crunchbase.com/organization/ourcrowd#section-overview [https://perma.cc/B84L- N4MD] (last visited Aug. 17, 2020). 172. “Gust is the global plat --- orm --- or --- ounding, incorporating and operating scalable, high growth companies. It leverages that position—and Gust’s allied plat --- orm --- or investment organizations—to enable the early-stage investing ecosystem. Gust’s knowledge and collaboration tools support all aspects o --- corporate legal and equity --- ormation, operation and --- unding --- or entrepreneurs --- rom startup to exit.” Gust - Crunchbase Company Pro --- ile & Funding, CRUNCHBASE, https://www.crunchbase.com/organization/gust#section-overview [https://perma.cc/L2T9-6GN2] (last visited Aug. 17, 2020). 173. “SeedInvest is an equity crowd --- unding plat --- orm that provides investors with access to highly vetted startup investment opportunities. The SeedInvest network contains over 15,000 accredited investors, including hundreds o --- --- amily o --- --- ices and institutions. SeedInvest typically invests between $500,000 – $5 million as part o --- a syndicate.” SeedInvest – Crunchbase Investor Pro --- ile & Funding, CRUNCHBASE https://www.crunchbase.com/organization/seedinvest#section- overview [https://perma.cc/7DED-87SE] (last visited Aug. 17, 2020). 174. For example, AngelList employs a team o --- lawyers and CPAs who review prospective investors’ --- inancial in --- ormation in order to veri --- y that they meet the de --- inition o --- “accredited investors” pursuant to Regulation D. Investor Accreditation, ANGELLIST, https://angel.co/help/accreditation [https://perma.cc/63C9-DJ5H ] (last visited July 28, 2020). 175. Social network sites are de --- ined as web-based services that “allow individuals to (1) construct a public or semi-public pro --- ile within a bounded system, (2) articulate a list o --- other users with whom they share a connection, and (3) view and traverse their list o --- connections and those made by others within the system. The nature and nomenclature o --- these connections may vary --- rom site to site.” Danah M. Boyd & Nicole B. Ellison, Social Network Sites: De --- inition, History, and Scholarship, 13 J. COMPUTER-MEDIATED COMM. 210, 211 (2008), https://onlinelibrary.wiley.com/doi/pd --- /10.1111/j.1083-6101.2007.00393.x [https://perma.cc/U4MJ-KWLL]. 176. Ashton Kutcher Pro --- ile, ANGELLIST, https://angel.co/aplusk [https://perma.cc/6UN4- VG9L] (last visited Aug. 17, 2020). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 49 virtual summits together.177 Gust provides investors with communication tools that allow them to discuss, track, review, and share in --- ormation about deals.178 SeedInvest allows potential investors to message companies directly or post questions to the company’s discussion board that all potential investors can see.179 All these plat --- orms have a rigorous process --- or determining whether a user is “accredited.” Throughout its site, AngelList states “[y]ou must be an accredited investor to invest on AngelList.”180 AngelList --- urther requires investors to go through a ten-minute application process, which requires users to answer --- inancial questions, provide links to online pro --- iles, write narratives about investment experience, and certi --- y to the --- ollowing: • I indemni --- y AngelList and understand that most startups lose investors’ money. • I understand that AngelList doesn’t veri --- y in --- ormation on the site, and I’m responsible --- or diligence. • I --- I invest, I will use an attorney and comply with securities laws. • I will be permanently banned --- rom AngelList i --- I --- alsely represent my accreditation status.181 AngelList then spends up to a week reviewing each application. AngelList reserves the right to request additional in --- ormation or to deny access. This is the most rigorous investor review process encountered during the research --- or this Article. Such social network --- eatures are particularly use --- ul --- or the --- ormation o --- investment syndicates. A syndicate is a group o --- investors who --- ollow a lead investor.182 The lead investors are responsible --- or sourcing the deal, per --- orming due diligence, negotiating the terms, and managing the closing. Sometimes, the lead obtains a seat on the company’s board in 177. Livestream: Watch the Summit Live --- rom Anywhere, OURCROWD SUMMIT, https://summit.ourcrowd.com/livestream/ [https://perma.cc/UUN8-U6DC] (last visited Aug. 17, 2020). 178. Investors, GUST, https://gust.com/investors [https://perma.cc/B85E-569A] (last visited Aug. 17, 2020). 179. FAQs, SEEDINVEST, https://www.seedinvest.com/ --- aqs [https://perma.cc/AN8Z-NADN] (last visited Aug. 17, 2020). 180. Syndicates --- or Investors, ANGELLIST, https://angel.co/syndicates/ --- or-investors [https://perma.cc/PX4V-4PSA] (last visited Aug. 17, 2020); AngelList Help: What is an Accredited Investor?, ANGELLIST, https://help.angel.co/article/747-what-is-an-accredited-investor [https://perma.cc/4KWE-3HUY] (last visited Aug. 17, 2020). 181. Account Creation Page, ANGELLIST, https://angel.co/join?source=homepage&source_content=global_header_join_text [https://perma.cc/9GWS-H2B7] (last visited Aug. 17, 2020). 182. See Syndicates, ANGELLIST, https://angel.co/syndicates [https://perma.cc/G3RE-DBZ3] (last visited May 27, 2020) (providing the de --- inition o --- a syndicate). Electronic copy available at: https://ssrn.com/abstract=3548312 50 Loyola University Chicago Law Journal [Vol. 52 order to ensure that the company continues to serve the investors’ interests. In exchange --- or these e --- --- orts, the lead sometimes receives what is re --- erred to as the “carry,” which is a percentage commission on the pro --- its --- rom the deal.183 Syndicates are very important --- or investing because they can increase e --- --- iciency. Instead o --- each investor doing diligence --- or themselves, which would result in a massive duplication o --- e --- --- orts when multiple investors are involved, a single person can be trusted with this task. The lead investor is o --- ten the one with the most experience and resources and so is the least cost avoider184 --- or this job. Follow-on investors can trust that the lead will per --- orm diligence duti --- ully because the carried interest that the lead earns i --- the deal is pro --- itable is expected to --- urther motivate the lead to take care. This also simpli --- ies negotiations because the company can negotiate with the lead alone rather than with several counterparties. AngelList --- ocuses on syndicates --- or its investments, and syndicates on AngelList are private groups. To join a syndicate, an investor needs to apply to the lead investor. AngelList has over 200 syndicate leads— experienced angel investors who (presumptively) have vetted target investments. Leads share details about investment opportunities with their --- ollowers, who typically have --- ive business days to decide whether to invest. B. Equity Crowd --- unding Portals Remember that entrepreneurs were permitted to raise --- unds through equity crowd --- unding portals starting in 2015.185 The most popular o --- those portals is currently WeFunder.com, which --- unded $25.8 million in 2018.186 Upon signing up --- or WeFunder, it becomes immediately apparent that the plat --- orm takes a very social approach to crowd --- unding. It --- irst asks the new user to upload a picture and to connect your Facebook, LinkedIn, Twitter, and AngelList account. Another crowd --- unding portal, MicroVentures, permits the user to sign up directly 183. Jo Tango, How are VC’s Paid?, JTANGO VC (Mar. 2, 2012), https://jtangovc.com/how- vcs-are-paid/ [https://perma.cc/5CFP-BTV3]. 184. The least-cost avoider is the party who has the lower cost o --- avoiding harm. In tort law, the least-cost avoider principle is the assignment o --- liability to the party who has the lowest cost o --- avoiding harm. See Eric Rasmusen, Agency Law and Contract Formation, 6 AM. L. & ECON. REV. 369, 380 (2004) ( --- urther explaining the “Least-Cost Avoider” principle). 185. See Prive, supra note 138 (announcing that startups are now able to publicly advertise that they are seeking investment during startup --- undraising). 186. Brian Thopsey, The Top 10 Equity Crowd --- unding Portals 2019, FUNDWISDOM (Nov. 3, 2019), https:// --- undwisdom.com/article/brian-thopsey/top-10-equity-crowd --- unding-portals-2019 [https://perma.cc/6ZJX-ACHD]. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 51 through other social media applications such as Twitter or Google+.187 WeFunder then asks the user to indicate his or her skills, such as engineering or --- inance, and to answer some questions such as “how do you think we can --- ix America?” It is a bit quirky in this regard, asking, --- or example, “[w]hat is your post apocalyptic [sic] survival skill?”188 The answers to these questions are shared with other users, presumptively to make the experience more human and social. WeFunder users are asked to select --- rom a list o --- interests that range --- rom minority-owned businesses, “mainstreet” small businesses, space travel, moonshots,189 alcohol, arti --- icial intelligence, and sustainability.190 The range o --- these topics implies that WeFunder users are impact investors or even venture philanthropists.191 An impact investor is one who cares about the “triple bottom line”: people, planet, and pro --- it.192 Impact investors are seen on non-equity crowd --- unding plat --- orms,193 where social e --- --- ects like homophily (the tendency to associate and bond with similar others)194 motivate investors to contribute to projects.195 I --- equity crowd --- unding users are motivated to invest by the same principles 187. Account Login Page, MICROVENTURES, https://app.microventures.com/account/login [https://perma.cc/YU28-99N2] (last visited Aug. 17, 2020). 188. Invest in Startups You ♡, WEFUNDER, http://we --- under.com/welcome (select sign up and create a pro --- ile) [https://perma.cc/B4YG-RDFB] (last visited Aug. 13, 2020). 189. A moonshot is an extremely di --- --- icult task, the pursuit o --- which may seem crazy. See Alex Davies, Why ‘Moon Shot’ Has No Place in the 21st Century, WIRED (July 16, 2019, 7:00 AM), https://www.wired.com/story/apollo-11-moonshot-21st-century/ [https://perma.cc/67ZE-624C] (“Fi --- ty years a --- ter Neil Armstrong walked on the moon, planted an American --- lag, and --- lew home, the term moon shot has become shorthand --- or trying to do something that’s really hard and maybe a bit crazy.”) (emphasis in original). 190. MicroVentures similarly asks what industries the user is interested in, such as “clean tech,” “ --- inancial tech,” “educational tech,” “local businesses,” and/or “media/entertainment.” See MICROVENTURES, supra note 187 (asking users to denote their pre --- erences while creating an account). 191. See Seth C. Oranburg, Start-Up Financing 2.0 (Mar. 6, 2016; 2d Ed. --- orthcoming 2021) at 15–16, https://ssrn.com/abstract=2743072 [https://perma.cc/HGF7-9DPG] (de --- ining venture philanthropy and impact investing and explaining their role in start-up --- inancing). 192. See Our Story, SUSTAINABILITY, https://sustainability.com/who-we-are/our-story/ [https://perma.cc/YFZ2-WTGL] (last visited Aug. 13, 2020) (providing the origin story and philosophy o --- SustainAbility, whose --- ounder coined the term “triple bottom line”); see also Triple Bottom Line, ECONOMIST (Nov. 17, 2009) https://www.economist.com/news/2009/11/17/triple- bottom-line [https://perma.cc/CU2R-EXCG] (de --- ining the three “lines” o --- the triple bottom line). 193. See, e.g., Jason Greenberg & Ethan Mollick, Activist Choice Homophily and the Crowd --- unding o --- Female Founders, 62 ADMIN. SCI. Q. 341, 357–58 (2017) (examining the extent to which --- emale --- ounded companies are --- unded through donation-based crowd --- unding). 194. See Barbara S. Lawrence & Neha Parikh Shah, Homophily: Measures and Meaning, 2 (UCLA Working Paper 2017) (de --- ining homophily). 195. See Jason Greenberg & Ethan Mollick, Leaning In or Leaning On? Gender, Homophily, and Activism in Crowd --- unding, ACAD. MGMT. PROCEEDINGS 1, 1–2 (July 2014) (“[A] small proportion o --- --- emale investors disproportionately support women-led projects in areas where women are historically underrepresented.”). Electronic copy available at: https://ssrn.com/abstract=3548312 52 Loyola University Chicago Law Journal [Vol. 52 that apply to non-equity crowd --- unders—such as social cohesion, a sense o --- belonging, desire --- or acceptance, and helping similar others—then it is unsurprising that equity crowd --- unding plat --- orms would heavily utilize social media devices, as WeFunder does. WeFunder then asks the user --- inancial questions that are relevant to determine how much the user is permitted to invest each year on equity crowd --- unding. It also requires the user to check several boxes acknowledging the risks o --- equity crowd --- unding. To proceed, the user must answer yes to “I understand securities on WeFunder are not easily resold. There is no secondary market. I can wait years --- or a return.”196 Notably, the author was able to register --- or WeFunder as an “accredited investor” simply by dragging the “net wealth” slider to “1 million.”197 WeFunder did not ask --- or any veri --- ication o --- income or assets be --- ore allowing the author to proceed to research and invest in companies.198 Other crowd --- unding portals, like EquityZen,199 were slightly more stringent, requiring the user to check a box stating: “I understand that I may be permanently banned --- rom EquityZen i --- I provide --- alse in --- ormation relating to my status as an accredited investor.”200 On the other end o --- the spectrum, MicroVentures states that “[y]ou do not have to be an accredited investor to invest on the MicroVentures plat --- orm”; however, “accredited investors may have access to additional investment opportunities.”201 Notably, WeFunder is not restricted to only accredited investors either, and they boast that anyone can “invest as little as $100 in startups and small businesses.”202 WeFunder does admit that 196. In prior work, this Article’s author explained how the lack o --- a resale market --- or crowd --- unding securities could chill interest in purchasing these securities in the --- irst place. See Oranburg, supra note 145, at 1013 (recommending a new “Rule 144B” that would permit the resale o --- crowd --- unded securities, much like Rule 144A permits the resale o --- private securities that were originally sold under Reg D.); see also 17 C.F.R. § 230.144A (2019) (de --- ining rules regarding private resales o --- securities to institutions); see also Open an Investor Account, WEFUNDER, http://we --- under.com/welcome [https://perma.cc/B4YG-RDFB] (last visited Aug. 13, 2020) 197. See WEFUNDER, supra note 196 (guiding potential investors in creating an account); see also Investor Veri --- ication Process, WEFUNDER, https://we --- under.com/accredited/veri --- ication [https://perma.cc/B5RN-93MB] (last visited Aug. 13, 2020) (explaining the process by which WeFunder veri --- ies potential investors’ income and net worth). 198. However, there is a veri --- ication process that takes place within 48 hours o --- registering as an accredited investor. Id. 199. The Marketplace --- or Pre-IPO Equity, EQUITYZEN, https://equityzen.com [https://perma.cc/97XS-53G5] (last visited Aug. 13, 2020). 200. Are you an accredited investor?, EQUITYZEN, https://equityzen.com/investor/access [https://perma.cc/Y6HU-K7CF] (last visited Aug. 17, 2020); How to Know i --- You’re an Accredited Investor, EQUITYZEN, https://equityzen.com/knowledge-center/newsletter/how-to-know-i --- -youre- an-accredited-investor/ [https://perma.cc/CH93-TWTJ] (last visited Aug. 13, 2020). 201. MICROVENTURES, supra note 187. 202. Investor Relations, WEFUNDER, https://we --- under.com/jobs/support [https://perma.cc/537N-MYR2] (last visited Aug. 13, 2020). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 53 “it’s complicated” and “when you sign up --- or a WeFunder account, [WeFunder will] do all these calculations --- or you.”203 The WeFunder inter --- ace is quite di --- --- erent --- rom AngelList,204 and MSC,205 in that WeFunder --- ocuses on “trending” companies.206 This once again rein --- orces the social dimension o --- this plat --- orm. Companies are --- eatured more prominently as users “heart” campaigns.207 Each campaign has its own promotional page. WeFunder --- ocuses heavily on the identity o --- the --- ounder with images and videos o --- the --- ounders talking about their product, whereas AngelList --- ocuses on the identity o --- the other investors, and Manhattan Street Capital (MSC) --- ocuses on the nature o --- the product and the --- inancials. C. Mini-IPO Portals The most success --- ul Reg A+ portal to date is MSC.208 This plat --- orm --- ocuses on mid-stage and mature companies.209 MSC is a password- protected website but creating an account is simple—all that is needed is a username and password. Users do not have to provide any personally identi --- ying in --- ormation in order to browse the site. O --- --- erings span many industries ranging --- rom real estate, biologics, electric vehicles, and even novel gol --- products. Each o --- --- ering has its own web page which generally --- eatures graphics and videos about the company, the product, and the team. For example, MSC --- eatured an opportunity to invest in Gol --- Suites 1, an investment company that develops hybrid-gol --- centers (like Top Gol --- ) in the Midwest region.210 Terms o --- the o --- --- ering are listed as $5.20 per share with a minimum investment o --- $500.211 There is a button on the 203. How Much am I Allowed to Invest?, WEFUNDER, https://help.we --- under.com/legal/304304- how-much-am-i-allowed-to-invest [https://perma.cc/XDT3-3VNQ] (last visited Aug. 13, 2020). 204. See in --- ra Section III.A (discussing the --- eatures o --- Angel investment portals). 205. See in --- ra Section III.C (discussing the --- eatures o --- mini-IPO portals). 206. See Invest in Startups You Love, WEFUNDER, https://we --- under.com/explore [https://perma.cc/BB2T-VA8Y] (last visited Aug. 13, 2020) (allowing WeFunder users to sort through start-ups by various --- eatures, including whether the start-up is trending). 207. See id. (allowing WeFunder users to “heart” companies that interest them). 208. See About Us, MANHATTAN ST. CAP., https://www.manhattanstreetcapital.com/about-us [https://perma.cc/8VBT-VVEF] (last visited Aug. 13, 2020) (asserting that MSC supports investing through Reg D, Reg S, and even Security Token O --- --- erings (“STOs”) or Blockchain o --- --- erings). 209. Id. 210. See Gol --- Suites 1, MANHATTAN ST. CAP., https://www.manhattanstreetcapi- tal.com/gol --- suites [https://perma.cc/6F6G-2EPH] (last visited Aug. 13, 2020) (providing details re- garding Gol --- Suites investment opportunity). 211. The share price was increased --- rom $5.20 to $5.30 in an April 27, 2020, supplement to the o --- --- ering. Id.; see also Gol --- Suites O --- --- ering Circular Supplement, MANHATTAN ST. CAP. (Apr. 27, 2020), https://www.manhattanstreetcapital.com/o --- --- ering-circular/17483 [https://perma.cc/8782- AD5H] (re --- lecting share price changes). Electronic copy available at: https://ssrn.com/abstract=3548312 54 Loyola University Chicago Law Journal [Vol. 52 promotional web page to “invest now,” even be --- ore reading the o --- --- ering circular. Upon clicking “invest now,” the user --- ills out a very simple --- orm: how much to invest ($500 minimum), investor type (individual, company, or trust or IRA), legal name, email, phone, country and state o --- residence, and whether a U.S. citizen or a permanent resident. There is an optional --- ield to indicate whether the user is an accredited investor. Beyond that, the user simply checks the box to con --- irm the in --- ormation is correct, the user read the o --- --- ering circular,212 and that the user’s annual income or savings is greater than $5000. MSC does not require the user to upload any documentation that would prove this is true. On the second page, the user enters address and payment in --- ormation. Debit cards, ACH, wire trans --- ers, and personal checks are accepted. I --- the user selects personal check, a green “proceed” option appears, and the user thus enters into a legally binding transaction to purchase this stock, including a promise to pay --- or it via a check in the mail. Investing with MSC is a remarkably simple process, but users can get more involved i --- they so choose. For example, users can write or read others’ comments, “like” the o --- --- ering, or send a message to the issuer asking questions. The user can also read the o --- --- ering circular, which includes --- inancial statements.213 O --- all the portals mentioned, MSC emphasizes its social media content the least, but social media tools are still made available to MSC users. Upon clicking “comments,” the user can view various posts --- rom other users and replies which are generally made by the issuer’s CEO. Quite --- rankly, many o --- the comments are unhelp --- ul and potentially distracting. For example, on October 12, “Robert” commented that “Huge New Jersey and [New York] market thousands o --- [N]ew Yorkers come to the [P]oconos and spend lots o --- money also have lots o --- summer and winter homes here huge market maybe you should take a look then I would consider [i]nvesting contact me.”214 The CEO replied, “since this particular o --- --- ering is --- or the midwest US, the NY/NJ area is not in the equation --- or now.”215 Obviously, Robert did not read the promotional 212. Gol --- Suites O --- --- ering Circular Supplement, MANHATTAN ST. CAP. (Feb. 21, 2020), https://www.manhattanstreetcapital.com/sites/de --- ault/ --- iles/GS1_OC_with_Supplements_02-21- 2020.pd --- [https://perma.cc/D8UA-JJTY]. 213. Gol --- Suites O --- --- ering Circular Supplement, supra note 211 (this in --- ormation is also accessible via a link on MSC’s page --- or Gol --- Suites 1, supra note 210). 214. Robert, Comment to Gol --- Suites 1, MANHATTAN ST. CAP. (Oct. 12, 2019), https://www.manhattanstreetcapital.com/gol --- suites [https://perma.cc/6F6G-2EPH]. 215. Jerry Ellenburg, Reply to Robert’s comment on Gol --- Suites 1, MANHATTAN ST. CAP. (Oct. 17, 2019), https://www.manhattanstreetcapital.com/gol --- suites [https://perma.cc/6F6G-2EPH]. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 55 materials or the o --- --- ering circular be --- ore posting this comment.216 It may also be the case that users are investing without reading these materials—a notion that the SEC surely would use to support the ban on general solicitation. Unsophisticated investors—ones that do not read or do not know how to read such investment materials—are the precise classi --- ication o --- individual the SEC is out to “protect” with the regulations described in this Article. The SEC’s intentions may be pure and geared at improving social wel --- are at large, but at what cost? Should our goal be to protect unsophisticated investors --- rom themselves, or can we build a regulatory regime that protects the vulnerable while simultaneously promoting the creation o --- wealth --- or people like Karen --- rom rural Dallas, South Dakota? D. Analysis o --- Investment Plat --- orms The three types o --- investment plat --- orms described above—angel investor, equity crowd --- unding, and mini-IPO—each have similar --- eatures. To a greater or lesser extent, they all use social media to engage users, they all require users to answer some basic --- inancial questions, and they all source and promote investment opportunities. However, the di --- --- erences are much greater than the similarities. 1. Investor Scrutiny The --- irst dimension in which these plat --- orms vary is their degree o --- scrutiny o --- the user. The most scrutiny applies to angel investor plat --- orms. From a legal perspective, this makes sense. The inclusion o --- even one nonaccredited investor in a --- inancing that seeks to be exempt --- rom registration pursuant to Reg D Rule 506(c) may lose its exempt status merely by soliciting a nonaccredited investor.217 On the other end o --- the spectrum are the equity crowd --- unding plat --- orms. Although users had to check a --- ew boxes certi --- ying, --- or example, that they understand that the securities cannot be resold, it was not clear that an ordinary investor would pay attention to or understand these cautionary steps. Other plat --- orms provide even less warning and go as --- ar as advertising that you can invest as little as $100.218 In general, the equity crowd --- unding plat --- orms have a more whimsical approach. The mini-IPO plat --- orms are in the middle. Reg A+ does not require as much investor 216. See Gol --- Suites O --- --- ering Circular, supra note 211 (providing updated and supplemental in --- ormation regarding the Gol --- Suites investment opportunity). 217. See 17 C.F.R. § 230.506(c) (2019) (de --- ining exemptions --- or limited o --- --- ers and sales without regard to dollar amount o --- o --- --- ering). 218. See WeFunder FAQ, WEFUNDER, https://help.we --- under.com/#/getting-started- --- or- --- ounders [https://perma.cc/2CC4-MZM4] (last visited Aug. 13, 2020) (explaining that WeFunder does not require custodians --- or companies that o --- --- er investment contracts directly to every investor on WeFunder who invests as little as $100). Electronic copy available at: https://ssrn.com/abstract=3548312 56 Loyola University Chicago Law Journal [Vol. 52 scrutiny as Reg D Rule 506(c) does, but the mini-IPO plat --- orms had a serious look and --- eel.219 2. Financial Focus The plat --- orms also had a di --- --- erent degree o --- --- ocus regarding --- inances. The mini-IPO plat --- orm was the most --- inancially --- ocused. The organization o --- the site, the presentation o --- the promotional materials, and the questions asked in the comments --- ocused on matters related to risk (e.g., quality o --- product, competitors, background o --- managers) and return (e.g., prospects --- or an IPO, dividends, historical --- inancial per --- ormance).220 On the other end o --- the continuum was the equity crowd --- unding plat --- orms, which --- ocused on other matters such as social impact, the --- ounders’ stories, community development, eco- --- riendly processes and other “ --- eel-good” aspects that were not directly related to return on investment. The angel investment plat --- orms were the middle o --- the road. AngelList predominately --- ocused on the “lead” investor, whose reputation --- unctioned as a sort o --- proxy --- or the issuer’s --- inancial potential.221 OurCrowd’s use o --- investor summits and video dialogue with management mixes --- inancial acumen with the human element. 3. O --- --- ering Volume The third way in which these plat --- orms di --- --- er signi --- icantly is the volume o --- o --- --- erings that occur on these websites. By --- ar, the angel crowd --- unding plat --- orms have the most volume o --- sales via the Reg D Rule 506(c) o --- --- erings. As mentioned above, Regulation D was and remains the most utilized exemption to securities registration 219. Websites can convey a serious or whimsical look and --- eel by choosing certain --- onts, colors, and images. See e.g., Ted Hunt, In --- ographic in A Pro Designer Shares the Psychology o --- Font Choices, THE DAILY EGG, https://www.crazyegg.com/blog/psychology-o --- - --- onts-in --- ographic/ [https://perma.cc/64B5-8BFP] (Oct. 21, 2019) (showing a visual representation o --- the emotions di --- --- erent --- onts typically evoke); see also Nick Kolenda, Font Psychology, NICK KOLENDA PSYCH. & MKTG., https://www.nickkolenda.com/ --- ont-psychology/ [https://perma.cc/9NPP-22K3] (last visited Aug. 13, 2020) (explaining the “art and science” o --- choosing --- onts). MSC’s website conveys a serious tone by using sharp edged sans seri --- --- onts that produce an impression o --- stability and objectivity. See Ted Hunt, A Pro Designer Shares the Psychology o --- Font Choices, THE DAILY EGG, https://www.crazyegg.com/blog/psychology-o --- - --- onts-in --- ographic/ [https://perma.cc/64B5- 8BFP] (Oct. 21, 2019) (deciphering the “personality” o --- di --- --- erent --- onts). MSC’s website also uses “corporate blue,” a color that is typically associated with business, “intelligence, stability, unity, and conservativism.” See Jacci Howard Bear, A Guide to the Color Corporate Blue, LIFEWIRE (Dec. 20, 2018), https://www.li --- ewire.com/what-color-is-corporate-blue-1077385 [https://perma.cc/JQ39-X9WG] (explaining that people have certain --- eelings, emotions, and associations in response to type --- aces and --- onts). 220. See Gol --- Suites 1, supra note 210 (providing detailed in --- ormation about the Gol --- Suites 1 investment opportunity). 221. See Syndicates, supra note 182 (de --- ining a syndicate and showing users di --- --- erent options to begin investing with syndicates). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 57 requirements,222 with more than $1.8 trillion in capital raised via Regulation D in 2017.223 While only 4% o --- this was via Reg D Rule 506(c),224 that still accounts --- or $54 billion. Regulation A is a distant second, with about $500 million raised in 2017 via that exemption.225 Regulation CF is another order o --- magnitude smaller in terms o --- o --- --- ering volume with $59.2 million in proceeds reported in 2017.226 The table below summarizes the key di --- --- erences among social media investment portals. Portal Type Regulation Investor Financial O --- --- ering Scrutiny Focus Volume Angel Investor Reg D High Medium High Rule 506(c) Equity Reg CF Low Low Low Crowd --- unding Mini-IPO Reg A Medium Medium Medium IV. “GENERAL SOLICITATION” ON SOCIAL MEDIA Are social media investment portals engaged in “general solicitation”? Is all social media activity a “general solicitation” or is none o --- it? As discussed in Part II, general solicitation is a very important concept in securities law because certain exemptions to the requirement to register stock o --- --- erings with the SEC are only available where there has been “no general solicitation.”227 However, neither the SEC nor the courts have answered the question: What constitutes a general solicitation on social media? This part attempts to answer that question. Its analysis clari --- ies the value and necessity o --- portals. Moreover, this discussion sheds light on whether the general solicitation ban still makes sense in today’s marketplace. 222. See Parnall, Kohl & Hu --- --- , supra note 128, at 634 (examining the history and evolution o --- Regulation D); see also The Most Common Exemption –Regulation D Rule 506, CAP. FUND L. BLOG, https://www.capital --- undlaw.com/blog/2015/04/05/the-most-common- exemptionregulation-d-rule-506 [https://perma.cc/5LKL-35FV] (last visited Sept. 2, 2020) (explaining Regulation D exemptions). 223. Ilirjan Pipa & Christopher Hawley, SEC Reports Large Increase in Capital Raised via Private Placements, MCDONALD HOPKINS (Nov. 15, 2018), https://mcdonaldhopkins.com/Insights/Blog/Business-Insights/2018/11/15/SEC-reports-large- increase-in-capital-raised-via-private-placements [https://perma.cc/JD7D-URRN]. 224. Id. 225. Turner, supra note 164. 226. 2017 State o --- Regulation Crowd --- unding Report, CROWDFUND CAP. ADVISORS (Jan. 24, 2018), https://crowd --- undcapitaladvisors.com/2017-state-regulation-crowd --- unding-report/ [https://perma.cc/B85N-RTUL]. 227. Private Placements – Rule 506(b), SEC (Mar. 12, 2020), https://www.sec.gov/smallbusiness/exempto --- --- erings/rule506b [https://perma.cc/U6Y2-V7Z2]. Electronic copy available at: https://ssrn.com/abstract=3548312 58 Loyola University Chicago Law Journal [Vol. 52 Although the SEC has not commented extensively on what actions are a “general solicitation,” and has not commented on what social media actions would establish a violation o --- Regulation D, the SEC has provided some general guidance: “General solicitation” includes advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. In addition, the use o --- an unrestricted, and there --- ore publicly available, website constitutes general solicitation. The solicitation must be an “o --- --- er” o --- securities, but solicitations that condition the market --- or an o --- --- ering o --- securities may be considered to be o --- --- ers.228 Aside --- rom this general description, investors must rely on SEC no- action letters and the Compliance and Disclosure Interpretations (C&DIs) released by the SEC in 2013 to determine what could be a general solicitation. One characteristic that the SEC has emphasized repeatedly is the existence o --- a “pre-existing relationship” between the issuer and the potential investor. The SEC explained that a “pre-existing” relationship is “one that the issuer has --- ormed with an o --- --- eree prior to the commencement o --- the securities o --- --- ering or, alternatively, that was established through either a registered broker-dealer or investment adviser prior to the registered broker-dealer or investment adviser participation in the o --- --- ering.”229 The existence o --- a pre-existing relationship is one means o --- demonstrating that an o --- --- ering is not a general solicitation. In some cases, it can be a challenge to determine when a pre-existing relationship has “commenced” --- or one investor but not --- or others. In an SEC no-action letter to Lamp Technologies, Inc., the Commission allowed solicitation through the use o --- a password-protected website.230 In --- ormation about private o --- --- erings was allowed to be generally disseminated because the company required each investor to wait --- or a thirty-day period be --- ore they could participate in any o --- --- ering.231 This 228. Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A O --- --- erings, SEC, sec.gov/in --- o/smallbus/secg/general-solicitation-small-entity- compliance-guide.htm [https://perma.cc/A3GU-5P6L] (Sept. 20, 2013). 229. Securities Act Rules Question 256.29: Compliance & Disclosure Regulations, SEC, https://www.sec.gov/divisions/corp --- in/guidance/securitiesactrules-interps.htm [https://perma.cc/65QH-DNQL] (Nov. 6, 2017) [hereina --- ter C&DI]; see also E.F. Hutton & Co., SEC No-Action Letter, 1985 WL 55680, at *1 (Dec. 3, 1985) (responding to request --- or interpretive advice regarding ensuring o --- --- erings did not involve general solicitations in violation o --- Rule 502(c)). 230. Lamp Technologies, Inc., SEC No-Action Letter No. 98-123, 2 (May 29, 1998) https://www.sec.gov/divisions/investment/noaction/1998/lamptech052998.pd --- [https://perma.cc/WGT4-SLLX] [hereina --- ter Lamp Technologies]. 231. Id. at 6. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 59 --- urther con --- uses the question o --- what constitutes a pre-existing relationship because it is not clear whether a thirty-day waiting period is a sa --- e harbor, whether the particular --- acts o --- that situation made thirty days reasonable in that instance, or whether the SEC would ignore the result o --- this nonbinding nonaction letter in --- uture matters altogether. The Lamp holding also seems at odds with other SEC statements. In a no-action letter to Citizen VC, Inc., the SEC recognized a pre-existing relationship because Citizen VC put investors through a vetting process that was “designed to evaluate the prospective investor’s sophistication, --- inancial circumstances and ability to understand the nature and risks o --- the securities to be o --- --- ered.”232 It did not recognize a waiting period as a --- actor in evaluating the merits o --- Citizen VC. The Commission has also concentrated on the speci --- ic type o --- in --- ormation circulated to investors and the number o --- investors it has been circulated to in determining i --- general solicitation has occurred. As stated above, Rule 502(c), in addition to Rule 506(b), bans general solicitation. To avoid general solicitation, the SEC has stated that “ --- actual business in --- ormation that does not condition the public mind or arouse public interest in a securities o --- --- ering is not an o --- --- er and may be disseminated widely” without contravening Rule 502(c).233 “Factual business in --- ormation . . . typically is limited to in --- ormation about the issuer, its business, --- inancial condition, products, services, or advertisement o --- such products or services, provided the in --- ormation is not presented in such a manner as to constitute an o --- --- er o --- the issuer’s securities.”234 Even though the SEC has not placed a hard limit on the number o --- investors an issuer can communicate with, they have considered it a --- actor in determining i --- there has been general solicitation. “Further, any publication o --- in --- ormation by a company in registration other than by means o --- a statutory prospectus should be limited to --- actual in --- ormation and should not include such things as predictions, projections, --- orecasts or opinions with respect to value.”235 Additionally, the Commission noted, “the greater the number o --- persons without --- inancial experience, sophistication or any prior personal or business relationship with the 232. Citizen VC, Inc. Response o --- the O --- --- ice o --- Chie --- Counsel Division o --- Corporate, SEC No- Action Letter Finance (Aug. 6, 2015) https://www.sec.gov/divisions/corp --- in/c --- - noaction/2015/citizen-vc-inc-080615-502.htm [https://perma.cc/SHB8-AM5F]. 233. C&DI, supra note 229, at Question 256.24. 234. Id. at Question 256.25. 235. Guidelines --- or Release o --- In --- ormation by Issuers Whose Securities are in Registration, 36 Fed. Reg. 16,506, 16,507 (Aug. 21, 1971). Electronic copy available at: https://ssrn.com/abstract=3548312 60 Loyola University Chicago Law Journal [Vol. 52 issuer that are contacted . . . the more likely the communications are part o --- a general solicitation.”236 Generally, publicly available in --- ormation, i --- published, is not considered a general solicitation. In 1986, the SEC wrote they would not take action against Nancy Blasberg --- or publishing and selling a guide to investment banking --- irms that contained in --- ormation such as name, address, phone number, date o --- issue, dividend rate, number o --- shares originally issued, and other things, as they pertained to outstanding privately-placed pre --- erred stock issues.237 The Commission commented that the guide only contained “certain limited in --- ormation” on already “completed o --- --- erings.”238 This conclusion is consistent with the earlier letter to Richard Daniels which said it would not be a violation o --- the ban on general solicitation proscribed by Rule 502(c) i --- “a newsletter setting --- orth in --- ormation derived totally --- rom public records” was published.239 Issuers o --- securities are permitted to circulate written materials to o --- --- erees as long as they are not intended to in --- luence investor decisions. Publicly available in --- ormation in the Blasberg and Daniels letters did not have the e --- --- ect o --- swaying the opinions o --- those to whom it was distributed. In 1986, J.D. Manning, Inc., asked the SEC i --- they could publish a newsletter that listed and described “closely held businesses” in southwest Florida “which may expect to raise capital in --- uture transactions.”240 Businesses in the region would pay a --- ee --- or the right to have some o --- the in --- ormation they provided to J.D. Manning selected --- or publication.241 The SEC noted that although some o --- that in --- ormation may have been --- actual in nature, it appeared “that an o --- --- er, within the purview o --- section 2(3) o --- the Securities Act,” may be involved, so they could not “conclude that there would be no general solicitation --- or purposes o --- Rule 502(c).”242 All o --- this guidance, however, does not explicitly describe how it applies to the realm o --- social media. As o --- 2016, the average Facebook user had 155 “ --- riends.”243 Does that constitute a pre-existing relationship 236. C&DI, supra note 229, at Question 256.27. 237. Nancy H. Blasberg, SEC No-Action Letter, 1986 WL 67060, at *1–2 (July 12, 1986). 238. Id. at *2. 239. Richard Daniels, SEC No-Action Letter, 1984 WL 45960, at *1 (Dec. 12, 1984). 240. J.D. Manning, Inc., SEC No-Action Letter, 1986 WL 65354, at *1 (Feb. 28, 1986). 241. Id. at *2. 242. Id. at *6. 243. Facebook By the Numbers: Stats, Demographics & Fun Facts, OMNICORE ANALYTICS, https://www.omnicoreagency.com/ --- acebook-statistics/ [https://perma.cc/7ME7-E55N] (Apr. 22, 2020); Sarah Knapton, Facebook Users Have 155 --- riends—But Would Trust Just Four in a Crisis, TELEGRAPH UK (Jan. 20, 2016) https://www.telegraph.co.uk/news/science/science- news/12108412/Facebook-users-have-155- --- riends-but-would-trust-just- --- our-in-a-crisis.html [http://perma.cc/5HY4-UY48]. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 61 with all o --- them? Justin Tayler, a nightclub promoter, reached the 5,000 “ --- riends” cap on Facebook.244 Does that mean Mr. Tayler could solicit all o --- them --- or an investment opportunity? I --- a social network emerged that permitted a user to have tens o --- thousands or even millions o --- --- riends, would that constitute a pre-existing relationship with all o --- them? For that matter, --- ormer President Barack Obama has over 121 million --- ollowers on Twitter.245 Does he have a pre-existing relationship with all o --- them? While these questions remain unresolved, companies and individuals like Karen should be reluctant to incur the SEC’s attention by soliciting Facebook --- riends with investment opportunities. Indeed, as that simple hypothetical illustrates, it may remain impossible to de --- ine what constitutes a pre-existing relationship on social media. The nature o --- relationships is di --- --- erent on each social media website. The degree to which this relationship has any relevance to securities o --- --- erings will also vary --- rom network to network. On the one hand, networks --- ormed --- or the purposes o --- sourcing investments would probably --- all within the prohibition contemplated by Citizen VC. On the other hand, Facebook relationships may not. However, this is the inverse result o --- what a rational securities regulation should produce. Users who visit investment network sites are more likely to be sophisticated and able to protect themselves against --- raudulent investment o --- --- erings than are users who are solicited while casually browsing on a social network site. Moreover, the lack o --- clarity makes all o --- this conduct risky. Eliminating the ban on general solicitation would remove this issue. This is just one reason among many that the ban should be eliminated, but it is one that grows in weight as the nature o --- communication shi --- ts more and more onto social networks. There are about 7.7 billion people in the world today, and 3.5 billion o --- them—nearly hal --- —are online.246 Facebook alone has 2.4 billion users.247 Over 79% o --- all Americans are on social media as o --- 2019.248 The number o --- social media users is predicted to continue to grow as internet adoption expands throughout 244. Gabriel Rosu, Meet the Guy with the Largest Number o --- Facebook Friends, ETEKNIX (2015), https://www.eteknix.com/meet-guy-largest-number- --- acebook- --- riends/ [https://perma.cc/52ED-9As2]. 245. The Most Followed Accounts on Twitter, BRANDWATCH (July 30, 2020) https://www.brandwatch.com/blog/most-twitter- --- ollowers/ [https://perma.cc/HA9L-SQVM]. 246. Esteban Ortiz-Ospina, The Rise o --- Social Media, OUR WORLD IN DATA (Sep. 18, 2019), https://ourworldindata.org/rise-o --- -social-media [http://perma.cc/6ZVP-HCRV] 247. Id. 248. J. Clement, Percentage o --- U.S. Population Who Currently Use Any Social Media --- rom 2008 to 2019, STATISTA (May 19, 2020) https://www.statista.com/statistics/273476/percentage-o --- - us-population-with-a-social-network-pro --- ile/ [https://perma.cc/D6CA-Y79A]. Electronic copy available at: https://ssrn.com/abstract=3548312 62 Loyola University Chicago Law Journal [Vol. 52 low-income countries249 and rural communities in America.250 Curtis Jackson, more --- amously known as rapper 50 Cent, --- ound himsel --- backtracking to avoid trouble with the SEC in 2011 when he took to Twitter and urged his 3.8 million --- ollowers to buy stock in a company in which he was an investor.251 He touted the ability to “double your money” i --- investors were to “get in now,” and that the company was going to “blow[] up.”252 His actions sent the stock price “soaring some 270%.”253 Although the Commission never went a --- ter Jackson, it is likely because he quickly removed and replaced those tweets. Today, Jackson has over 12.1 million Twitter --- ollowers.254 Pro --- essional boxer Floyd Mayweather Jr. and music producer DJ Khaled were not as lucky as 50 Cent. In 2018, Mayweather tweeted that Centra Tech’s ICO was about to start and urged his --- ollowers to buy by saying, “[g]et yours be --- ore they sell out, I got mine” while DJ Khaled described it on his Twitter as a “[g]ame changer.”255 Mayweather has over 7.8 million --- ollowers,256 and DJ Khaled has over 5 million --- ollowers.257 Although it is clear that celebrities like Mayweather were openly trying to sway investor decision making, it seems untenable to determine that all o --- the other billions o --- users who are networked on various plat --- orms have a pre-existing relationship su --- --- icient to avoid the general solicitation 249. See Max Roser, Hannah Ritchie & Esteban Ortiz-Ospina, Internet, OUR WORLD IN DATA (2015), https://ourworldindata.org/internet#growth-o --- -the-internet [https://perma.cc/5DJ8-CZT7] (explaining that usage rates are increasing in the developing world). 250. See Lara Fishbane & Adie Tomer, Broadband Adoption is on the Rise, but States Can Do Much More, BROOKINGS (Oct. 10, 2019), https://www.brookings.edu/blog/the- avenue/2019/10/10/broadband-adoption-is-on-the-rise-but-states-can-do-much-more/ [https://perma.cc/8RSF-K3DL] (explaining that the digital divide between high adoption and low adoption states is narrowing and showing a correlation between larger rural populations and low adoptions rates). 251. Chris Barth, Get Rich or Die Tweetin’, FORBES (Jan. 11, 2011, 11:50 AM), https://www. --- orbes.com/sites/chrisbarth/2011/01/11/get-rich-or-die-tweetin/#5b7 --- 71b --- 6d --- 3 [https://perma.cc/5PYP-W7M6]. 252. Id. 253. Kathy Kristo --- , What 50 Cent Co. is Really Selling, CBS NEWS (Jan. 18, 2011, 3:06 PM), https://www.cbsnews.com/news/what-50-cent-co-is-really-selling/ [https://perma.cc/Z3S7- VSX6]. 254. 50cent (@50cent), TWITTER (2020), https://twitter.com/50cent?re --- _src=twsrc^google| twcamp^serp|twgr^author [https://perma.cc/ZR9Y-4TXH]. 255. Press Release: Two Celebrities Charged with Unlaw --- ully Touting Coin O --- --- erings, SEC (Nov. 29, 2018), https://www.sec.gov/news/press-release/2018-268 [https://perma.cc/GZX3- KQN7]. 256. Floyd Mayweather (@FloydMayweather), TWITTER (2020), https://twitter.com/FloydMayweather?re --- _src=twsrc^google|twcamp^serp|twgr^author [https://perma.cc/5QUW-JDQQ]. 257. DJ Khaled (@djkhaled), TWITTER (2020), https://twitter.com/djkhaled?re --- _ src=twsrc^google|twcamp^serp|twgr^author [https://perma.cc/9EDF-QFFL]. Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 63 ban. It goes without saying that some o --- the “ --- riends” and “ --- ollowers” shared between social media users must constitute pre-existing relationships; however, --- or the SEC, there is no clear way to distinguish between them. Yet the impossibility o --- applying the ban to social media at large is only one reason why it should be eliminated. V. THE DEBATE ABOUT GENERAL SOLICITATION Recall Karen, our small-town entrepreneur, and Kevin, the well- connected big-city businessman. It goes without saying that Kevin has access to more opportunities, among other advantages, due to his --- amily, --- riends, and location. But in today’s society, individuals are better connected than ever be --- ore. Indeed, “[t]he development o --- social networking sites (Facebook, Twitter, Instagram) in recent years, has radically changed both customers online purchasing habits and the way businesses promote their products and services.”258 Sites like eBay connect buyers and sellers o --- used (and new) goods across states, spanning the country, and even the globe.259 With the ability to connect buyers and sellers so e --- --- iciently, it seems reasonable that, as a society, we can provide the same ease o --- access to entrepreneurs and investors. Connecting people through the internet and social media should be just as easy. Karen can now have a level o --- access substantially closer to Kevin’s. It is not uncommon --- or regulation to lag behind innovation. We have seen a similar lag in other emerging markets, such as the ever-growing blockchain and cryptocurrency realm.260 A similar lag has been seen with 258. Curzi Valerio et al., The Impact o --- Social Media on E-Commerce Decision Making Process, 1 INT’L J. TECH. FOR BUS. (IJTB) 1, 1 (2019). 259. See Selling Internationally, EBAY, https://www.ebay.com/help/selling/selling/selling- internationally?id=4132 [https://perma.cc/QKX2-397W] (last visited Aug, 12, 2020) (providing users with in --- ormation on how to sell internationally). 260. See, e.g., Carla L. Reyes, Moving Beyond Bitcoin to an Endogenous Theory o --- Decentralized Ledger Technology Regulation: An Initial Proposal, 61 VILL. L. REV. 191, 193–95 (2016) (“This Article suggests a di --- --- erent approach . . . that both addresses potential market and government --- ailures and takes into account the unique nature o --- the technology at issue.”); Joshua A.T. Fair --- ield, Bitproperty, 88 S. CALIF. L. REV. 805, 869 (2015) (“There is a growing consensus that block chain technologies will be regulated.”); Sarah Jane Hughes & Stephen T. Middlebrook, Advancing A Framework --- or Regulating Cryptocurrency Payments Intermediaries, 32 YALE J. REG. 495, 495 (2015) (“We use Article 4A o --- the Uni --- orm Commercial Code as a model --- or regulating transactions in which intermediaries play a role.”); Jeanne L. Schroeder, Bitcoin and the Uni --- orm Commercial Code, 24 U. MIAMI BUS. L. REV. 1, 1 (2016) (“The bad news is [cryptocurrency] does not, and cannot be made to --- it into, the U.C.C.’s de --- inition o --- ‘money’.”); Michael Abramowicz, Cryptocurrency-Based Law, 58 ARIZ. L. REV. 359, 359 (2016) (“A modest starting point --- or cryptocurrency-based governance would be as a replacement --- or Bitcoin’s centralized system --- or changing its source code.”). Electronic copy available at: https://ssrn.com/abstract=3548312 64 Loyola University Chicago Law Journal [Vol. 52 Uber, Ly --- t, and the gig economy,261 as well as with advertising and data privacy.262 As these examples illustrate, technological change --- requently necessitates a change in law. Here, we see that a --- undamental change in communication technology (social media) requires a change in the law regarding how we communicate about investment opportunities (general solicitation). Many scholars have already commented on the need --- or regulatory change to the ban on general solicitation. Arguments have been advanced in --- avor o --- relaxing or completely removing the ban both in regard to ordinary as well as accredited investors. The primary argument --- or relaxing the ban is that the general solicitation ban was ill-conceived --- rom the beginning. There is no legislative history that indicates why Congress instituted the ban in the --- irst place. Over time, the --- ederal anti-solicitation ban grew broader as judges sought to punish bad actors.263 But, as is sometimes said, bad --- acts make bad law.264 Along similar lines is the argument that the anti-solicitation ban was never needed because small o --- --- erings are too small to matter and large o --- --- erings go to purchasers who “do not really need Big Brother’s protection.”265 Another argument is that the thinking about how to regulate has dramatically changed since the securities regulations were --- irst enacted in 1933. Even twenty years ago, scholars recognized that regulatory assumptions had changed over the sixty- --- ive years since the securities regulations were enacted.266 This resulted in sweeping changes to other regulations including privatizing --- raud liability standards in unregistered o --- --- erings, validating party choice in domestic and international securities 261. See Seth C. Oranburg, Unbundling Employment: Flexible Bene --- its --- or the Gig Economy, 11 DREXEL L. REV. 1, 1 (2018) (arguing --- or the creation o --- new legal paradigms to govern the gig economy). 262. See Suzanne Vranica, How Privacy Rules Will A --- --- ect the Ad Industry, WALL ST. J. (June 17, 2019) (“[A] surge in privacy regulation around the globe has marketers, publishers and plat --- orms scrambling to make sure they are compliant with new laws and pending regulations.”); Om Mahida, It’s 2020 and We Still Have a Data Privacy Problem, THE NEXT WEB (Jan. 25, 2020) https://thenextweb.com/podium/2020/01/25/its-2020-and-we-still-have-a-data-privacy-problem/ [https://perma.cc/N4N9-7D7K] (“Europe and Cali --- ornia have introduced regulations to protect individual consumer data, . . . yet there is no --- ederal law to protect the rights o --- the individual.”). 263. Patrick Daugherty, Rethinking the Ban on General Solicitation, 38 EMORY L.J. 67, 134 (1989). 264. See N. Sec. Co. v. United States, 193 U.S. 197, 400 (1904) (Holmes, Jr., dissenting) (“Great cases like hard cases make bad law. For great cases are called great, not by reason o --- their real importance in shaping the law o --- the --- uture, but because o --- some accident o --- immediate overwhelming interest which appeals to the --- eelings and distorts the judgment.”). 265. Daugherty, supra note 263, at 134; see generally GEORGE ORWELL, 1984 (1949) (creating the character, “Big Brother,” who is always watching, supposedly --- or the best interests o --- the people, and who has become symbolic o --- mass government surveillance and abuse o --- civil liberties). 266. Alan R. Palmiter, Toward Disclosure Choice in Securities O --- --- erings, 1999 COLUM. BUS. L. REV. 1, 135 (1999). Electronic copy available at: https://ssrn.com/abstract=3548312 2020] Securities Regulation and Social Media 65 transactions, and upholding disclosure disclaimers and other contractual waivers in securities --- raud cases.267 Congress implemented cost-bene --- it analyses --- or securities --- raud class actions, and the SEC began permitting broad choice as to o --- --- ering methods and disclosure levels.268 This increased attention to policing speci --- ic --- raud a --- ter the --- act should correspond with a decreased --- ocus on precluding broad general categories (such as the categorical ban on advertising) o --- --- undraising activities.269 Yet another argument is that the world has changed, and whatever protection may have been a --- --- orded by the ban is no longer necessary. The distinction between “public” and “private” o --- --- erings has eroded in today’s world,270 making the arti --- icial statutory distinction problematically outdated.271 Meanwhile, investors have become more sophisticated and there --- ore are less in need o --- these protections.272 To these weights on the scale in --- avor o --- relaxing or eliminating the ban on general solicitation, this Article adds two more. First, the vagaries o --- what constitutes a “general solicitation” in the context o --- social media chills and prevents activities that may not be barred at all. Second, removing the ban would allow ordinary investors to organize into syndicates on social media, which would allow them to be more e --- --- icient and to protect themselves as a group. Moreover, there are alternative ways to redress harms caused by bad actors who are --- ooling innocent people into purchasing the “wrong” securities. Anti- --- raud laws such as section 10(b) o --- the Securities 267. Id. 268. Id. 269. Paul G. Mahoney, Technology, Property Rights in In --- ormation, and Securities Regulation, 75 WASH. UNIV. L.Q. 815, 847–48 (1997). 270. See, e.g., Martin Enserink & Gilbert Chin, The End o --- Privacy, 347 SCI. 490, 491 (2015) (“Privacy as we have known it is ending, and we’re only beginning to --- athom the consequences.”). 271. See William K. Sjostrom, Jr., Relaxing the Ban: It’s Time to Allow General Solicitation and Advertising in Exempt O --- --- erings, 32 FLA. ST. U.L. REV. 1, 50 (2004) (“This persistence is not the result o --- strong ideology, but is the result o --- a seventy-year-old statutory distinction between public o --- --- erings and private or limited o --- --- erings entrenched by overlapping --- ederal and state securities regulations.”). 272. Jeremy Derman, Does the SEC Rule the Job Creation Roost? Squaring SEC Rulemaking with the JOBS Act’s Relaxation o --- the Prohibition Against General Solicitation and Advertising, 47 SUFFOLK U.L. REV. 139, 163 (2014) (“Nonetheless, what the JOBS Act does accomplish by ‘relaxing the ban’ is the removal o --- an archaic rule that has little place in today’s sophisticated securities market—one vastly di --- --- erent --- rom that o --- 1982, when Regulation D was --- irst promulgated.”). Electronic copy available at: https://ssrn.com/abstract=3548312 66 Loyola University Chicago Law Journal [Vol. 52 Exchange Act o --- 1934273 and plain old common law --- raud274 protections can be applied ex post to redress such harms and to discourage such behaviors. CONCLUSION It is time --- or the SEC’s ban on general solicitation o --- securities to be swept into the dustbin o --- history. The ban never had a clearly articulated goal, and this Article has shown that it has clear harms. The disparate impact o --- the ban against rural, poor, or otherwise less well-connected entrepreneurs is cause enough --- or its termination. Proo --- o --- the problem is highlighted by contrast: securities exemptions that permit general solicitation are more egalitarian. Such an unjust law should not stand. The ban should also be dispensed with --- or its lack o --- clarity in our social media age. Technological changes o --- ten necessitate change in law; here, the advent o --- social media and its widespread use as a primary mode o --- communication by an entire generation o --- people required this re- examination o --- the nearly hundred-year-old proscription. Upon review, the ban proves to be severely de --- icient and highly problematic in our digital age. The ban’s prophylactic ends can be served by better means. To the extent that it serves some countervailing goal such as protecting investors, there are more e --- --- icient tools, such as anti- --- raud laws, that better serve those ends. There --- ore, the SEC should eliminate the ban against general solicitation in order to --- urther its mission o --- protecting investors while --- acilitating capital --- ormation. 273. As codi --- ied under 17 C.F.R. § 240.10b-5 (2019): “It shall be unlaw --- ul --- or any person, directly or indirectly, by the use o --- any means or instrumentality o --- interstate commerce, or o --- the mails or o --- any --- acility o --- any national securities exchange, (a) To employ any device, scheme, or arti --- ice to de --- raud, (b) To make any untrue statement o --- a material --- act or to omit to state a material --- act necessary in order to make the statements made, in the light o --- the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course o --- business which operates or would operate as a --- raud or deceit upon any person, in connection with the purchase or sale o --- any security.” 274. See RESTATEMENT (THIRD) OF TORTS: LIAB. FOR ECON. HARM § 9 (AM. LAW INST. 2020) (“One who --- raudulently makes a material misrepresentation o --- --- act, opinion, intention, or law, --- or the purpose o --- inducing another to act or re --- rain --- rom acting, is subject to liability --- or economic loss caused by the other’s justi --- iable reliance on the misrepresentation.”). Electronic copy available at: https://ssrn.com/abstract=3548312