Monday, April 1, 2024

Finfluencers and the Reasonable Retail Investor

Calling attention today to Sue Guan's paper, Finfluencers and the Reasonable Retail Investor, posted on SSRN and forthcoming to the University of Pennsylvania Law Review Online.  The abstract is copied in below.

Much recent commentary has focused on the dangers of finfluencers. Finfluencers are persons or entities that have outsize impact on investor decisions through social media influence. These finfluencers increasingly drive investing and trading trends in a wide range of asset markets, from stocks to cryptocurrency. They do so because they can provide powerful coordination mechanisms across otherwise diffuse investor and trader populations. Of course, the more influence wielded over their followers, the easier it is for finfluencers to perpetrate fraud and manipulation.

The increase in finfluencing has highlighted a gray area in the securities laws: a finfluencer's statements may not be factually untrue or clearly deceptive, but they can be interpreted as misleading depending on the context and the particular beliefs held by the finfluencer’s social media followers. Moreover, such statements can harm investors who buy or sell based on their interpretation of the finfluencer's activity. In other words, finfluencers can easily profit off of their followers' trading activity while steering clear of the securities laws.

A recent case has narrowed finfluencers' ability to do so. This Piece argues that In re Bed Bath and Beyond provides a path to holding finfluencers accountable even when they have not made clearly untrue statements. In considering materiality, In re Bed Bath and Beyond focuses on the reasonable retail investor. This places primacy on retail investors’ interpretation of social media activity and narrows a gap in securities oversight, demonstrating that existing securities laws can be flexible enough to deter and punish a significant portion of problematic finfluencer behavior. In doing so, it opens a path forward for harmed retail investors to seek redress from careless finfluencers.

Sue offers a video summary here

In this work, Sue takes on one of my favorite topics: materiality.  She sees the potential for courts to use the reasonable retail investor--as opposed to the reasonable investor--as the reference point for materiality analysis in securities fraud actions.  Truly interesting.

Social media does move markets.  Investors, retail investors, act on what they read in social media.  They may even act based on interpretations of emojis, as  Sue suggests.  I appreciate her taking on the legal aspects of market behavior in this context.  I am confident more will be said about this as additional cases are brought.

Joan Heminway, Research/Scholarhip, Securities Regulation | Permalink


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