Federal securities regulation originally divided corporate finance into two neat categories, public and private. In 1933, private financing was limited to “sophisticated” investors but otherwise lightly regulated. Public financing became heavily regulated. In 1982, the SEC introduced Reg D, which introduced the concept of “general solicitation” to clarify the distinction between public and private offerings. 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 effectively banning general solicitations in private offerings.
Now, social media communication challenges the definition of “general solicitation.” Although social media comes in a multitude of forms, there is no guidance as to whether a single post or tweet might violate securities regulations. Confusion and fear of violating the ban on general solicitation chills online investment, even though online investment technology offers new and better means of protecting investors from fraud and undue risk.
Meanwhile, society has grown wary of regulations that tend to concentrate immense wealth amid a privileged few. Movements like Occupy Wall Street demanded that ordinary Americans gain equal access to financial 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 of the general solicitation ban is a disparate impact upon the members of society who could benefit the most from entrepreneurial opportunities. The general solicitation ban helps the rich and well connected get richer while excluding new entrepreneurs and diverse investors from capital markets. The ban is technologically and socially out of date. Accordingly, the ban carries the heavy burden of proving that it prevents enough fraud to be worth its cost. It has not met this heavy burden. Therefore, the general solicitation ban should be abolished.
Loyola University of Chicago Law Journal
University of Chicago Law School
Seth C. Oranburg, Securities Regulation and Social Media, 52 Loy. U. Chi. L.J. 15 (2020).
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