Betabeat published a story yesterday about the ways in which tech investors who write about private companies on public blogs might run afoul of SEC regulations. It focused, naturally, on Mike Arrington, who saw the post around 2 a.m. this morning and responded with this tweet:
“Screw that. Let me introduce you to the first fucking amendment to our constitution.”
Mr. Arrington failed to provide any links to the first amendment, but luckily, Betabeat had spent yesterday afternoon conversing with Prof. John Coffee of Columbia University, one of the foremost experts on securities law in the nation.
“I do agree with Ralph Ferrara that the rules established by the Securities and Exchange Act of 1934 apply to public discussion of private companies in the same way it does to public companies,” said Prof. Coffee.
Prof. Coffee also agreed with Mr. Arrington that the first amendment offers some protections to bloggers writing about private companies in which they are investors with inside knowledge. “It’s not just about the sin of omission. Otherwise it would be impossible for anyone to write about companies with attaching a full prospectus to every post.”
The argument, should a case go to court, says Prof. Coffee, would be about proving deception. “Can you prove that this blogger wrote something which wasn’t their honest opinion, or show that they intended to deceive others?”
The portion of the Securities and Exchange Act of 1934 on which all this hinges is section 10 b-5: Employment of Manipulative and Deceptive Practices:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
- To employ any device, scheme, or artifice to defraud,
- To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
- To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
So the answer is, yes and no. Investors like Reid Hoffman, who wrote a post on TechCrunch about why Greylock invested in Groupon, are not guilty of fraud simply because they neglected to mention, let’s say, the $400 million a year Groupon was losing.
But by blogging publicly about the investment, and knowingly omitting a material fact about the company’s finances, Mr. Hoffman opened himself up to an investigation by the SEC or charges of fraud from investors who believe they suffered a financial loss as a result of his post (see Rochez Bros. vs Rhoades).
In Mr. Hoffman’s case, charges of market manipulation might center around the long expected IPO or the robust secondary market for trading equity in Groupon. And as Prof. Coffee points out, the fact that the secondary markets are much smaller and far less transparent than the public markets, means that manipulation is a much more serious issue.
“Especially in the very thin, private secondary markets, where there is little liquidity and share prices are more subject to manipulation, investors who blog publicly and don’t disclose contrary interest, are in violation of 10 b-5.”
P.S.—“The winner from this group receives the Disrupt Cup and $50,000, taking over possession from Disrupt New York winner Getaround. Without further ado, the runners-up is Prism Skylabs. And the winner is…Shaker! Disclosure: TechCrunch founder Michael Arrington is an investor in Prism Skylabs and is a pending investor in Shaker.”