According to a German court, you may need to if there is any hope the legal documents on your site or app will be binding upon individuals in Germany. While one might be tempted to groan over such a requirement at first, it makes some fundamental sense. As an American, I would never be able to read the terms and conditions of a site written in Japanese, so why should non-English speaking countries and their residents be required to do the same with English-language sites? [Read more…]
With millions investing in the stock market, investment newsletters can be a lucrative business niche. If you are considering starting an investment newsletter online, it is critical you understand there are serious legal risks associated with doing so. Fail to set up your newsletter business correctly and the SEC can pursue you for violating a variety of securities laws.
The first issue to be addressed is simple – are you a licensed investment advisor? If the answer is yes, then stop reading this article and speak with your compliance department. The compliance representatives will guide you through the regulatory framework applicable to licensed advisors.
If you are still reading, we can assume you are not a registered investment advisor. The good news is you can legally launch an investment newsletter online. The bad news is you must be very careful when doing so. The SEC is charged with protecting investors from unscrupulous promoters, and we all know there are some rather dubious stock promoters online. Given this, the SEC would prefer online investment newsletters only be published by registered investment advisors. Fortunately, the constitutional right to free speech limits the authority of the SEC.
Investment Advisers Act of 1940
The Investment Advisers Act of 1940 is the federal law applicable to individuals or companies providing investment advice online and off. As a very general rule, a party providing investment advice to the public must register as an investment advisor. However, the parties drafting the Investment Advisers Act recognized this strict licensing provision could conflict with constitutional free speech concepts. To address this concern, an exception to the registration requirement was created in section 202(a)(11)(D) of the Act in which it is noted a “publisher of a bona fide newspaper, news magazine or business or financial publication of general and regular circulation” is not required to register as an investment advisor.
While the “publisher’s exclusion” is a boon for individuals wishing to publish investment newsletters, the exclusion is not all encompassing.
Supreme Court – Lowe v. SEC
As you might imagine, the SEC has long lobbied for a narrow interpretation of the publisher’s exclusion found in the Investment Advisers Act of 1940. This effort produced a significant amount of litigation between the SEC and newsletter publishers. In 1985, the Supreme Court finally stepped in to address the scope of the exclusion in a landmark case known as Lowe v. SEC, 472 U.S. 181 (1985).
The facts giving rise to the Lowe v. SEC litigation are rather interesting. Lowe owned and operated Lowe Management Corporation. The company provided investment services to the public, and Lowe was a registered investment advisor. In 1981, the SEC revoked Lowe’s registration after he was convicted of:
- Misappropriating funds of an investment client,
- Engaging in business as an investment adviser without filing a registration application with New York’s Department of Law,
- Tampering with evidence to cover up fraud of an investment client, and
- Stealing from a bank.
Lowe responded by repositioning Lowe Management Corporation as a publisher of general circulation investment newsletters. The SEC was unimpressed and filed a legal action to stop the practice. The district court ruled for Lowe citing the publisher’s exclusion provision of the Investment Advisers Act of 1940. The Appellate Court reversed the lower court decision. The Supreme Court then took the case in what appears to have been an effort to establish a clear precedent for when unregistered parties can and cannot publish investment newsletters for the public.
In deciding the case, the Supreme Court noted the past crimes of Lowe were immaterial to whether his company could publish a newsletter. The only issue at hand was whether Lowe qualified for the publisher’s exclusion detailed in the Investment Advisers Act. The Court indicated a three prong test should be used to make the determination, to wit, whether:
- The newsletter is of a general and impersonal nature,
- The newsletter is of a bona fide and genuine nature, and
- The newsletter is published in general and regular circulation.
The Supreme Court found Lowe’s investment newsletters met all three prongs of the test and ruled in his favor by an 8-0 count with Justice Powell abstaining. For practical purposes, the Lowe v. SEC ruling establishes anyone can start an online investment newsletter so long as the publication meets the Lowe test.
Factual Analysis Required
Before you rush off to start the ACME Investment Newsletter, I can tell you it is important to understand a factual analysis of your newsletter business must be conducted to determine if you meet the Lowe test requirements. For example, what did the Supreme Court mean when it required an investment newsletter to have a “genuine and impersonal nature”? Subsequent court decisions have found certain acts, such as recommending a specific stock in response to a question from a newsletter subscriber or posting stock recommendations to an online investing forum, are “personal in nature” and fail the first prong of the test. This failure, of course, results in the publisher of the newsletter falling outside of the publisher’s exclusion, which can result in a legal disaster. Whether myself or local counsel, you should have your business model reviewed to make sure no aspects of it fails the Lowe test.
An additional potential problem found with many newsletters is a suggestion the newsletter will be devoted to developing events in the stock market. The third prong of the Lowe test requires the newsletter be published in general and regular circulation. Subsequent cases have interpreted this language to mean the newsletter can not be timed to market events. Any suggestion a newsletter will issue “breaking news” or “hot alerts” is going to be problematic and should be stricken from the site, the website legal documents, and marketing materials.
A common business model for investment newsletters is to charge a monthly or annual subscription rate to users. This model is known as a “recurring charge” model because the subscriber is automatically billed from time to time unless the subscriber cancels. What many newsletter providers do not seem to realize is there are state laws requiring certain disclosures be provided to individuals before they subscribe to the newsletter.
The nasty aspect of this legal requirement is the remedy. If you fail to provide the necessary disclosures, the subscriber can demand the return of every payment made to you pursuant to their subscription. If the customer has paid you $800 over four years, you must return the full $800. If your newsletters become popular, there is also a risk of being named in a class action lawsuit based on these laws – a legal and financial disaster for any investment newsletter business.
Starting an investment newsletter online can be a lucrative venture, so long as you have your legal ducks in order. Contact me today for a consultation on starting an investment newsletter online.
Richard A. Chapo, Esq.
- Investment Advisers Act of 1940 – Publisher’s Exemption To Registration Requirements – https://www.sec.gov/about/laws/iaa40.pdf
- Lowe v. SEC, 472 U.S. 181 (1985) – Supreme Court Weighs In On Investment Newsletters. – http://caselaw.findlaw.com/us-supreme-court/472/181.html
- California Automatic Renewal Law – California Business and Professions Code Sections 17600-17606 – http://www.leginfo.ca.gov/cgi-bin/displaycode?section=bpc&group=17001-18000&file=17600-17606
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- Safeway Grocery Stores – Improper price change language.
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It is the rare website these days that doesn’t allow user-generated content in one form or another. From Facebook allowing pretty much anything you can upload to an e-commerce site that sticks more to written reviews, user-generated content is here to stay. One of many legal issues this raises is who owns the copyright to the content uploaded by a user and, if it is not the website, can the ownership be transferred through clauses in the terms and conditions? [Read more…]