2025 Articles

With Whom Is Your Issue?: Use of Investor Sophistication in Defining the Scope of Seller Liability Under § 12(a)(2) of the Securities Act of 1933

Becker, Zachary

The rise of social media in the last two decades has given retail investors unprecedented information about and access to financial markets. But the introduction of new marketing strategies for financial products has also introduced new challenges for financial regulators. Regulatory agencies and judicial bodies alike are tasked with conforming the investor protection and market efficiency statutes of the 1930s to contemporary problems. Responses to the new paradigm of social media have diverged, though. One such divergence is the standard applied for Section 12(a)(2) liability under the Securities Act of 1933. Some circuit courts rely on traditional precedents that require direct solicitation of the investor as set forth in Capri v. Murphy and Craftmatic Securities Litigation v. Kraftsow. Meanwhile others have responded that mass communications like social media can give rise to Section 12(a)(2) liability. Most recently, the Ninth Circuit adopted this approach in Pino v. Cardone Capital LLC. This circuit split not only increases uncertainty amongst issuers of securities about the scope of potential liability. It also encourages forum shopping by plaintiffs seeking courts with broader and more favorable liability schemes. This Note proposes a solution to the circuit split in the form of an investor sophistication standard.