Raising Money On-Line

We talked earlier about the dangers of raising money through LinkedIn.  A Massachusetts Supreme Judicial Court decision this week made it even clearer that governments do not want companies to reach potential investors through websites that are open to the public and blind emails.

In Bulldog Investors General Partnership v. Secretary of the Commonwealth, SJC-10756 (Mass. Sept. 22, 2011), three hedge funds tried to find investors through a public website that anyone could could access.  Visitors interested in more information about the hedge funds could sign their names and email address.  Bulldog then followed up with emails that attached pamphlets and other promotionals for the funds. 

Bulldog and the website were all located outside of Massachusetts, and the marketing was not aimed directly at Massachusetts investors.  But in-state investors were by no means excluded from the pitch, and Bulldog was aware that at least one inquiring visitor was from Massachusetts.

The Massachusetts Secretary of State shut the website down, claiming Bulldog had violated. § 301 of G.L. c. 110A of the Massachusetts Uniform Securities Act (Massachusetts act) by offering unregistered securities to a Massachusetts resident through a publicly available Web site and an electronic mail (e-mail) message.

Bulldog sued, claiming among other things, that the Secretary of State impinged on its First Amendment rights to freedom of speech.

Bulldog was represented at the SJC by the eminent Constitutional scholar Laurence Tribe.  Tribe argued in part that the state should not be able to require Bulldog to issue disclosure statements becaue that constitutes forced speech.  The First Amendment argument, however, got exactly nowhere.

The SJC ruled that the state had power to regulate a website because it is commercial speech.  Courts will take a hard look if the state probitis commercial speech completely.  But if the state is only restricting the speech, then courts are much more lenient.

For more than 80 years, the state has had the power to regulate how securities are marketed.  The SJC pointed out that Bulldog was allowed to market its securities to the public, so long as it first registered teh securities with the SEC.  If Bulldog wanted to make a private offering, though, then it could only do that under Regulation D, marketing to accredited investors or a limited number of other investors who read full disclosures of the company first.

Since it was impracticable for Bulldog to give disclosures to potential investors before they got the information on the public website, Bulldog proposed instead disclosing before an actual sale was made. 

The SJC scowled.  That plan, the SJC said, “will likely decrease the quantity of information in the marketplace, will increase the likelihood of securities scams and of unlawful sales of unregistered securities to unsophisticated investors, and will weaken the market’s efficiency overall. Bulldog’s proposal to concentrate enforcement at the point of sale rather than at the offer stage increases the risk that enforcement will come too late to prevent the harm or permit monetary recovery.”

The takeaway is that anyone planning to market securities through internet offerings should proceed carefully.  As the SJC stated, “If any reminder was needed, the financial collapse in the autumn of 2008 that led to our persistent recession illustrates the extent to which unregulated and poorly regulated securities have the potential to become “financial weapons of mass destruction.”