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In Pino v. Cardone Capital, LLC, 2022 U.S. App. LEXIS 35278 (9th Cir. Dec. 21, 2022), the United States Court of Appeals for the Ninth Circuit (Lynn, J.) joined with the Eleventh Circuit in holding that a person may qualify as a statutory “seller” within the meaning of Section 12(a)(2) of the Securities Act of 1933 (the “Act”), 15 U.S.C. § 77l(a)(2), by promoting the sale of a security in mass communications made on social media. Online videos and social media posts may trigger liability because Section 12(a)(2) does not require that a solicitation be directed or targeted to a particular investor. The Ninth Circuit’s holding highlights the risk that investment companies and their advisers face if they promote or otherwise discuss the merits of securities offerings online.

Defendant Grant Cardone founded Cardone Capital, LLC, which managed Cardone Equity Fund V, LLC and Cardone Equity Fund VI, LLC (collectively, the “Funds”). The Funds invested in real estate assets throughout the United States by raising millions of dollars in crowdfunding using social media. Plaintiff Luis Pino invested in the Funds and filed a class action in the United States District Court for the Central District of California against Cardone, Cardone Capital, and the Funds asserting that they violated Section 12(a)(2) of the Act by soliciting investment in the Funds on Instagram and on YouTube postings that contained materially misleading statements and omissions. Pino also brought a claim for secondary “controlling person” liability under Section 15 of the Act, 15 U.S.C. § 77o(a), against Cardone and Cardone Capital.

Defendants Cardone and Cardone Capital moved to dismiss the claims against them contending that they did not qualify as statutory “sellers” under Section 12(a)(2) because they did not directly solicit Pino’s investment. The district court granted the motion and dismissed the complaint. Pino appealed to the Ninth Circuit, which reversed the dismissal of the claims against Cardone and Cardone Capital. 

Addressing an issue of first impression, the Ninth Circuit held that “indirect, mass communications to potential investors through social media posts and online videos” qualify as “solicitations” sufficient to allow the imposition of Section 12(a)(2) liability. Cardone and Cardone Capital qualified as “sellers” under the United States Supreme Court’s decision in Pinter v. Dahl, 486 U.S. 622 (1988), which extends liability “to the person who successfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner.” In so holding, the Ninth Circuit joined the Eleventh Circuit, which recently held in Wildes v. BitConnect International PLC, 25 F.4th 1341 (11th Cir. 2022) that videos posted on YouTube and other social media websites may constitute solicitation under Section 12, even if the offering’s promoters did not directly target the individual purchasers. 

The Ninth Circuit’s holding in Pino is noteworthy given the frequency with which promoters of securities communicate with potential investors on social media. In the age of crowdfunding, all persons who assist in the promotion of investment opportunities should be aware that discussing the potential benefits of a securities offerings online may lead to primary liability if those discussions contain materially false misleading statements or omissions.