Virtually most of government regulations curb our civil liberties. However, as the landmark case ended its four-year journey through the Massachusetts courts, the issue remains as to whether some securities laws violate the right to free speech?
In a case filed in 2007, hedge fund Bulldog Investors argued the securities laws violated its free speech, because it prevented fund’s managers from sharing fund information with general public. At the same time, the laws allowed anybody else who wasn’t a Bulldog manager to share the information with the general public. In addition, the laws allowed rich and sophisticated investors to have access to the information without restrictions. As opposed to, the poor and sophisticated investors could not have free access to the same information.
As the result, the fund argued, the securities laws violated its First Amendment right to speak freely.
Case Background
The hedge fund Bulldog Investors website fully disclosed true and non-misleading information on its investment strategy, the backgrounds of its managers, past performance and recent returns.
However, in early 2007 the Massachusetts Securities Commission shut down the website. The reason being, as the commission argued, the website was open to general public that allowed the Bulldog to engage in an illegal attempt to sell interests in its funds to the public. Consequently, the fund was accused of marketing to non-accredited investors.
In turn, Bulldog Investors founder Philip Goldstein sued the commission arguing that shutting down the website violated Bulldog’s right to free speech. The trial court found there was no free speech violation. Goldstein appealed.
After almost four-year court battle between the Commonwealth of Massachusetts and Goldstein, a Boston Superior Court judge entered a cease-and-desist order against Bulldog. The issue remains as to whether or not the securities laws violate the right to free speech?
Securities Laws Rules Violate Free Speech
In other words, how can the government allow willing investors to invest in companies while protecting them from fraud? One way, the government can collect all information about the companies and tell investors if they should invest. However, this approach could be considered as government supervision or, even worse, anti-free market or un-American. Besides the fact, the government would assume the liability for giving investment advice. The other way, the government can put the burden on the investors and let investors buy anything they want without any restrictions. This, of course, serves no protection at all.
Instead, the government turned its watchful eye to the companies. The regulators allow the companies sell anything the companies want, but only if they sell it to the rich and sophisticated. However, if companies want to sell it to everybody, including poor, unsophisticated and clueless investors, companies have to register with the regulators and fully disclose detailed information about the investments.
One of the reasons behind this rule is that the rich and sophisticated investors need less government intervention because they have access to the army of their own advisors (lawyers and accounts) who could help them decide the merits of the investment. So, if you have money you can buy sophistication and fend for yourself. As the result, the government stays out of the private decisions, while protects the masses.
What about free speech? What does free speech have to do with it?
To attract investors, most hedge funds such as Bulldog Investors need to engage in some form of advertizing. As the fund managers talk about their business or themselves, the fund engages in a type of speech the law calls “general solicitation.”
To protect the masses, the government makes funds register and structure their speech in very specific way before they are allowed to engage in general solicitation. So, the government is restricting speech. And if the speech is anything like that in the Bulldog case, then the government is restricting speech that is true and non-misleading.
This seems to be violating the freedom of speech, First Amendment. Right? Interestingly enough, the courts held otherwise.
Courts held that this type of speech is “commercial speech” designed to lead investors to buy a share in the company. The courts consider it second rate and not nearly as valuable as, for example, political speech. Which is why even true and not misleading speech may be restricted even if it serves to protect poor, unsophisticated and clueless investors.
Of course, hedge funds can simply not engage in “general solicitation” and avoid the restrictions. The problem is the law does not define “general solicitation,” so nobody quite knows exactly what kind of speech is or isn’t considered general solicitation.
Hedge fund managers may want to disclose certain information about their fund or themselves. Although, sometimes such speech sounds like an offer to buy a share of their fund, mostly managers like to discuss investment performance, investment strategy or their experience, in a general way without offering anything for sale.
Are all these instances of “general solicitation”? Why would managers want to discuss this information? Would managers want to discuss their business for purposes unrelated a sale of fund shares? Of course! They may be talking to a journalist preparing an informative article or a scholar writing a comparative study. Students or bloggers may also be interested in knowing about them. And what about recent registration requirements, where to register the fund managers required to make detailed disclosures to the general public?
Do all these cases involve commercial speech designed to entice into fraud the poor and unsophisticated investors? Where is the dividing line? There is no line.
That the message the regulators sending to the Bulldog Investors and every other company out there. The way regulators interpret the tem “general solicitation” is that anything you say on a forum open to anyone that the government thinks creates interest in you means you are engaging in general solicitation.
On a side note, Bulldog didn’t solicit the general public to buy its shares, but it did speak at length about its performance and its managers. However, the way the website worked, practically everybody could read it.
Finally, some might experts argue that the general solicitation rules are going too far. Every day, people hear about things they can’t afford or are not smart enough to understand, but they don’t necessary rush to buy them. Also, as in Bulldog’s case, providing information is not the same as selling something.
The rules stop funds from providing the public with the fund’s data, its investment details, but let anybody other than the fund do it without restriction. How is it different from the salesman at the Ferrari dealership showing cars the poor and unsophisticated buyers cannot afford and let bloggers post them on the internet?
The questions multiply with the expansion of the securities laws. Certainly, protecting poor and unsophisticated investors is a noble act, but maybe not at the expense of our civil liberties.
