Author: Kaitlin Flores

Memes, Tweets, and Stocks . . . Oh, My!

 

Pop-Culture’s Got A Chokehold on Your Stocks

In just three short weeks, early in January 2021, Reddit meme-stock traders garnered up enough of GameStop’s stock to increase its value from a mere $17.25 per share to $325 a pop. This reflected almost an 1,800% increase in the stock’s value. In light of this, hedge funds, like New York’s Melvin Capital Management, were left devastated, some smaller hedge funds even went out of business.

For Melvin, because they were holding their GameStop stock in a short position (a trading technique in which the intention is to sell a security with the plan to buy it back later, at a lower cost, in an anticipated short term drop), they lost over 50% of their stock’s value, which translated to nearly $7 billion, in just under a month.

Around 2015, the rise of a new and free online trading platform geared towards a younger generation, emerged in Robinhood. Their mission was simple — “democratize” finance. By putting the capacity to understand and participate in trading, without needing an expensive broker, Robinhood made investing accessible to the masses. However, the very essence of Robinhood putting the power back in the hands of the people, was also what caused a halt in GameStop’s takeover rise. After three weeks, Robinhood had to cease all buying or selling of GameStop’s shares and options because the sheer volume of trading had exceeded their cash-on-hand capacity, or collateral that is required by regulators to function as a legal trade exchange.

But what exactly is a meme-stock? For starters, a meme is an idea or element of pop-culture that spreads and intensifies across people’s minds. As social media has increased in popularity, viral pop-culture references  and trends have as well. Memes allow people to instantaneously spread videos, tweets, pictures, or posts that are humorous, interesting, or sarcastic. This in turns goes viral. Meme-stocks therefore originate on the internet, usually in sub-Reddit threads, where users work together to identify a target stock and then promote it. The goal of promoting a meme stock largely involves shorting the stock—as explained above—which means buying, holding, selling, and rebuying as prices fluctuate to turn a profit.

GameStop is not the first, and certainly not the last, stock to be traded in this fashion. But it represents an important shift in the power of social media and its ability to affect the stock market. Another example of the power meme-culture can have on real-world finances and the economy, is Dogecoin.

Dogecoin was created as satirical new currency, in a way mocking the hype around existing cryptocurrencies. But its positive reaction and bolstered interest on social media turned the joke crypto into a practical reality. This “fun” version of Bitcoin was celebrated, listed on the crypto exchange Binance, and even cryptically endorsed by Elon Musk. More recently, in 2021, cinema chain AMC announced it would accept Dogecoin in exchange for digital gift card purchases, further bolstering the credibility of this meme-originated cryptocurrency.

Tricks of the Trade, Play at Your Own Risk

Stock trading is governed by the Securities Act of 1933, which boils down to two basic objectives: (1) to require that investors receive financial and other material information concerning securities being offered for public sale; and (2) to prohibit any deceit, misrepresentations, and other fraud in the sale of securities. In order to buy, sell, or trade most securities, it must first be registered with the SEC—the primary goal of registration is to facilitate information disclosures, so investors are informed before engaging. Additionally, the Securities Exchange Act of 1934 provides the SEC with broad authority over the securities industry, to regulate, register, and oversee brokerage firms, agents, and SROs. Other regulations at play include the Investment Company Act of 1940 and the Investment Advisers Act of 1940 which regulate investment advisers and their companies, respectively. These Acts require firms and agents that receive compensation for their advising practices are registered with the SEC and adhere to certain qualifications and strict guidelines designed to promote fair, informed investment decisions.

Cryptocurrency has over the years grown from a speculative investment to a new class of assets and regulation is imminent. The Biden Administration has recently added some clarification on crypto use and its regulation through a new directive designating power to the SEC and the Commodity Futures Trading Commission (CFTC), which were already the prominent securities regulators. In the recent Ripple Labs lawsuit, the SEC began to make some strides in regulating cryptocurrency by working to classify it as a security which would bring crypt into their domain of regulation.

Consequentially, the SEC’s Office of Investor Education and Advocacy has adapted with the times and now cautions against  making any investment decisions based solely off of information seen on social media platforms. Because social media has become integral to our daily lives, investors are increasingly relying and turning to it for information when deciding when, where, and on what to invest. This has increased the likelihood of scams, fraud, and other misinformation consequences. These problems can arise through fraudsters disseminating false information anonymously or impersonating someone else.

 

However, there is also an increasing concern with celebrity endorsements and testimonials regarding investment advice. The most common types of social media online scam schematics are impersonation and fake crypto investment advertisements.

 

With this rise in social media use, the laws governing investment advertisements and information are continuously developing. Regulation FD (Fair Disclosure) provides governance on the selective disclosure of information for publicly traded companies. Reg. FD prescribes that when an issuer discloses any material, nonpublic information to certain individuals or entities, they must also make a public disclosure of that information. In 2008, the SEC issued new guidance allowing information to be distributed on websites so long as shareholders, investors, and the market in general were aware it was the company’s “recognized channel of distribution.” In 2013 this was again amended to allow publishing earnings and other material information on social media, provided that investors knew to expect it there.

This clarification came in light of the controversial boast by Netflix co-founder and CEO Reed Hastings on Facebook that Netflix viewers had consumed 1 billion hours of watch time, per month. Hasting’s Facebook page had never previously disclosed performance stats and therefore investors were not on notice that this type of potentially material information, relevant to their investment decisions, would be located there. Hastings also failed to immediately remedy the situation with a public disclosure of the same information via a press release or Form 8-K filing.

In the same vein, a company’s employees may also be the target of consequence if they like or share a post, publish a third-party link, or friend certain people without permission if any of those actions could be viewed as an official endorsement or means of information dissemination.

The SEC requires that certain company information be accompanied by a disclosure or cautionary disclaimer statement. Section 17(b) of the 1933 Act, more commonly known as the Anti-Touting provision, requires any securities endorsement be accompanied by a disclosure of the “nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for such endorsement.”

To Trade, or Not to Trade? Let Your Social Media Feed Decide

With the emergence of non-professional trading schematics and platforms like Robinhood, low-cost financial technology has brought investing to the hands of younger users. Likewise, the rise of Bitcoin and blockchain technologies in the early-to-mid 2010’s have changed the way financial firms must think about and approach new investors. The discussion of investments and information sharing that happens on these online forums creates a cesspool ripe for misinformation breeding. Social media sites are vulnerable to information problems for several reasons. For starters, which posts gain attention is not always something that can be calculated in advance—if the wrong post goes viral, hundreds to thousands to millions of users may read improper recommendations. Algorithm rabbit-holes also pose a risk to extremist views and strategically places ads further on this downward spiral.

Additionally, the presence of fake or spam-based accounts and internet trolls pose an ever more difficult problem to contain. Lastly, influencers can sway large groups of followers by mindlessly promoting or interacting with bad information or not properly disclosing required information. There are many more obvious risks associated but “herding” remains one of the largest. Jeff Kreisler, Head of Behavioral Science at J.P. Morgan & Chase explains that:

“Herding has been a common investment trap forever. Social media just makes it worse because it provides an even more distorted perception of reality. We only see what our limited network is talking about or promoting, or what news is ‘trending’ – a status that has nothing to do with value and everything to do with hype, publicity, coolness, selective presentation and other things that should have nothing to do with our investment decisions.”

This shift to a digital lifestyle and reliance on social media for information has played a key role in the information dissemination for investor decision-making. Nearly 80% of institutional investors now use social media as a part of their daily workflow. Of those, about 30% admit that information gathered on social media has in some way influenced an investment recommendation or decision and another third have maintained that because of announcements they saw on social media, they made at least one change to their investments as a direct result. In 2013, the SEC began to allow publicly traded companies to report news and earnings via their social media platforms which has resulted in an increased flow of information to investors on these platforms. Social media also now plays a large role in financial literacy for the younger generations.

The Tweet Heard Around the Market

A notable and recent example of how powerful social media warriors and internet trolls can be in relation to the success of a company’s stock came just days after Elon Musk’s acquisition of Twitter and only hours after launching his pay-for-verification Twitter Blue debacle.  Insulin manufacturing company Eli Lilly saw a stark drop in their stock value after a fake parody account was created under the guise of their name and tweeted out that “insulin is now free.”

This account acting under the Twitter handle @EliLillyandCo labeled itself, bought a blue check mark, and appended the same logo as the real company to its profile making it almost indistinguishable from the real thing. Consequently, the actual Eli Lilly corporate account had to tweet out an apology “to those who have been served a misleading message from a fake Lilly account.” And clarifying that, “Our official Twitter account is @Lillypad.”

This is a perfect example for Elon Musk and other major companies and CEOs just how powerful pop-culture, meme-culture, and internet trolls are by the simple fact that this parody account casually dropped the stock of a multi-billion dollar pharmaceutical company almost 5% in the matter of a few hours and weaponized with $8 and a single tweet.

So, what does all this mean for the future of digital finance? It’s difficult to say exactly where we might be headed, but social media’s growing tether on all facets of our lives leave much up for new regulation. Consumers should be cautious when scrolling through investment-related material, and providers should be transparent with their relationships and goals in promoting any such materials. Social media is here to stay, but the regulation and use of it are still up for grabs.

Corporate Use of Social Media: A Fine Line Between What Could-, Would-, and Should-be Posted

 

Introduction

In recent years, social media has taken a hold on nearly every aspect of human interaction and turned the way we communicate on its head. Social media apps’ high speed capability of disseminating information instantaneously have affected the way many sectors of business operate. From entertainment, social, environmental, educational, or financial, social media has bewildered the legal departments of many in house general counsels across all industries. Additionally, the generational shaft between the person actually posting for the account versus their supervisor has only exacerbated the potential for communications to miss their mark and cause controversy or adverse effects.

These days, most companies have social media accounts, but not all accounts are created equal, and they certainly are not all monitored the same. In most cases, these accounts are not regulated at all except by their own internal managers and #CancelCulture. Depending on the product or company, social media managers have done their best to stay abreast of changes in popular hashtags, trends and challenges, and the overall shift from a corporate tone of voice to one of relatability–more Gen-Z-esque, if you will. But with this shift, the rights and implications of corporate speech through social media has been put to the test.

Changes in Corporate Speech on Social Media 

In the last 20 years, corporate use of social media has become a battle of relevance. With the decline of print media, social media, and its apps, have emerged as a marketing necessity. Early social media use was predominantly geared towards social purposes. If we look at the origins of Facebook, Myspace, and Twitter it is clear that these apps were intended for superficial uses—not corporate communications—but this all changed with the introduction of LinkedIn, which sparked a dynamic shift towards business and professional use of social media.

Today social media is used to report on almost every aspect of our lives, from disaster preparation and emergency responses to political updates, to dating and relationship finders, and customer service based tasks, social media truly covers all. It is also more common now days to get backlash for not speaking out or using social media after a major social or political movement occurs. Social media is also increasingly being used for research with geolocation technology, for organizing demonstrations and political unrest, and in the business context, for development in sales, marketing, networking, and hiring or recruiting practices.

These changes are starting to lead to significant conversations in the business world when it comes to company speech, regulated disclosures and First Amendment rights. For example, so far, there is minimal research on how financial firms disseminate communications to investor news outlets via social media and in which format they are being responded to. And while some may view social media as an opportunity to further this kind of investor outreach, others have expressed concerns that disseminating communications in this manner could result in a company’s loss of control over such communications entirely.

The viral nature of social media allows not just investors to connect more easily with companies but also with individuals who may not directly follow that company and would therefore be a lot less likely to be informed about a company’s prior financial communications and the importance of any changes. This creates risk for a company’s investor communications via social media because of the potential to spread and possibly reach uniformed individuals which could in turn produce adverse consequences for the company when it comes to concerns about reliance and misleading information.

Corporate Use, Regulations, and Topics of Interest on Social Media 

With the rise of social media coverage on various societal issues, these apps have become a platform for news coverage, political movements, and social concerns and, for some generations, a platform that replaces traditional news media almost entirely. Specifically, when it comes to the growing interest in ESG related matters and sustainable business practices, social media poses as a great tool for information communication. For example, the Spanish company Acciona has recently been reported by the latest Epsilon Icarus Analytics Panel on ESG Sustainability, as having Spain’s highest resonating ESG content of all their social networks. Acciona demonstrates the potential leadership capabilities for a company to fundamentally impact and effectuate digital communications on ESG related topics. This developing content strategy focuses on brand values, and specifically, for Acciona, strong climate-change based values, female leadership, diversity, and other cultural, societal changes which demonstrates this new age of social media as a business marketing necessity.

Consequentially, this shift in usage of social media and the way we treat corporate speech on these platforms has left room for emerging regulation. Commercial or corporate speech is generally permissible under Constitutional Free Speech rights, so long as the corporation is not making false or misleading statements. Section 230 provides broad protection to internet content providers from accountability based on information disseminated on their platform. In most contexts, social media platforms will not be held accountable for the consequences resulting therefrom (i.e. a bad user’s speech). For example, a recent lawsuit was dismissed in favor of the defendant, TikTok, and its parent company, after a young girl died from participation in a trending challenge that went awry because under § 230 the platform was immune from liability.

In essence, when it comes to ESG-related topics, the way a company handles its social media and the actual posts they put out can greatly affect the company’s success and reputation as often ESG focused perspectives affect many aspects of the operation of the business. The type of communication, and coverage on various issues, can impact a company’s performance in the short term and long term hemispheres–the capability of which can effectuate change in corporate environmental practices, governance, labor and employment standards, human resource management and more.

With ESG trending, investors, shareholders, and regulators now face serious risk management concerns. Companies must now, more publicly, address news concerning their social responsibilities, on a much more frequent basis as ESG concerns continue to rise. Public company activities, through Consumer Service Reports, are mandated in annual 10-K filings and disclosures by the SEC, along with ESG disclosures thanks to a recent rule promulgation. These disclosures are designed to hold accountable and improve environmental, social, and economic performance when it comes to their respective stakeholders’ expectations.

Conclusion

In conclusion, social media platforms have created an entirely new mechanism for corporate speech to be implicated. Companies should proceed cautiously when covering social, political, environmental, and related concerns and their methods of information dissemination as well as the possible effects their posts may have on business performance and reputation overall.

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