Federal and state securities laws are premised on the belief that the government can constitutionally prohibit or limit speech in connection with the offer or sale of securities. At least one issuer has aggressively challenged this premise and has now taken its case to the U.S. Supreme Court.
Phillip Goldstein is an owner/manager of a group of funds collectively referred to as "Bulldog". In 2006, Mr. Goldstein successfully challenged the SEC's hedge fund rule under the Investment Advisers Act of 1940. Goldstein v. Securities and Exchange Commission, 451 F.3d 873 (D.C. Cir. 2006). During this same period, Bulldog maintained a website that provided information available to any visitor, including press articles and a printable brochure describing Bulldog's three investment vehicles. A visitor could obtain additional information only after being presented with a disclaimer. More specific information was available through a registration process.
In 2007, Massachusetts Securities Division filed an administrative complaint against Bulldog, alleging that Bulldog had offered securities for sale in the Commonwealth that were not properly registered or exempt, in violation of G.L. c.110A, the Massachusetts Uniform Securities Act, and regulations thereunder, 950 C.M.R. § 10 et seq., by means of the communi-cations appearing in the website. Perhaps following the old adage that the best defense is a good offense, Bulldog filed an action against the Secretary of the Commonwealth of Massachusetts. For more on what happened in Massachusetts, see Alan Parness' article, "The Bulldog Gets Muzzled" in The Blue Sky Bugle (February/March 2008).
In seeking certiorari before the U.S. Supreme Court, Bulldog presents the following two questions:
1. Whether a state ban on speech by an issuer of unregistered securities to members of the public based upon their financial status violates the First Amendment, where the speech is concededly truthful and non-misleading, and where the state characterizes the speech ban as a "disclosure rule" to further an objective that federal law does not permit the state to achieve directly.
2. Whether the Due Process Clause of the Fourteenth Amendment permits a forum state to exercise personal jurisdiction over a non-resident business solely because the business operated a website accessible from the state (and from any other location in the world) and sent a single concededly truthful and non-misleading e-mail responding to a resident’s inquiry, when the business did not enter (and, based upon these communications, could not have entered) into a transaction with the resident.
Should the Supreme Court hear the case and decide in favor of Bulldog on either of these questions, the implications would be significant for securities regulators.
Bulldog has enlisted the talents of Harvard Law School Professor Laurence Tribe. Below is an excerpt from Bulldog's petition:
There is no dispute that Bulldog is permitted to distribute the identical materials to accredited and financially sophisticated investors who certify themselves as such, or to investors with whom Bulldog has a prior relationship so that it is aware of their financial situation. Ironically, the only people to whom Bulldog is not permitted to supply the information are the very people who cannot act on it to buy securities (because Bulldog does not sell to them) – people like Hickey (an agent of a prominent law firm in litigation with Bulldog) and respondent Bloness (who sought the information for research, not to make purchases). Denying information to researchers, journalists, students, and other non-market participants cannot possibly promote the "integrity" of the market. (emphasis in original)
You can read Bulldog's petition here. A response is due April 4, 2012.