Social media sites are transforming not only the daily lives of consumers, but also how companies interact with consumers. Here at Morrison Foerster, across all of our practice groups, we are seeing complex, cutting-edge legal issues arising out of social media. As with the Internet boom during the mid-to-late 1990s, social media is generating new legal questions at a far faster pace than the law’s ability to provide answers to such questions. In an effort to stay on top of these emerging issues, and to keep our clients and friends informed of new developments, Morrison Foerster publishes this blog devoted to the law and business of social media.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Aaron is the chair of the firm’s Technology Transactions Group and co-chair of the Interactive + Digital Media Group. He advises clients on a wide range of complex transactions involving intellectual property and technology, including structuring and negotiating strategic licensing, development, collaboration, procurement, and distribution deals.Aaron’s practice focuses on advising both established and emerging companies in a variety of data- and technology-intensive sectors, including software, SaaS, cloud-based technology, digital media (social media, AR/VR, gaming, streaming media, AdTech), AI, healthcare, consumer electronics, e-commerce, other online business models, and mobile applications. He also maintains an active practice counseling companies on branding and marketing, trademark licensing, and content-related transactions, as well as the intellectual property aspects of mergers, acquisitions, asset spin-offs, and private equity investments.He has represented clients such as Autodesk, Meta, OpenAI, Splunk, Konami, Kaiser Permanente, SoftBank, Visa, and Yahoo, among others.Aaron has been recognized by numerous publications for his work on market-defining technology transactions. He is currently ranked by Chambers USA for “Technology Transactions.”Aaron also serves as co-editor of Socially Aware, the firm’s award-winning newsletter and blog devoted to the law and business of social media, and regularly publishes on various IP and technology-related topics. Aaron is also a sought-after speaker on new and emerging areas of law, and is a frequent presenter and panelist at conferences and legal services programs. In addition to his active practice, Aaron regularly provides pro bono assistance to various nonprofit and charitable organizations such as Common Sense Media and the Starlight Children’s Foundation. He is a member of the board of directors of California Lawyers for the Arts.While in law school at the University of California, Berkeley, Boalt Hall School of Law, Aaron served as executive editor of the California Law Review and was elected to the Order of the Coif. Following law school, Aaron served as law clerk to the Honorable William H. Orrick and the Honorable Martin J. Jenkins, both United States District Judges for the Northern District of California.

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Aaron is the chair of our Technology Transactions Group. He advises clients on a wide range of complex transactions involving intellectual property and technology, including structuring and negotiating strategic licensing, development, collaboration, procurement, and distribution deals. Aaron’s practice focuses on advising both established and emerging companies in a variety of data– and technology–intensive sectors, including software, SaaS, cloud computing, AR/VR, AI, gaming, healthcare, consumer electronics, social media, e–commerce, other online business models, and mobile applications. He also maintains an active practice counseling companies on the intellectual property aspects of mergers, acquisitions, asset spin–offs, and private equity investments.

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Lawrence Gallick is of counsel in the firm’s Austin office and a member of the Technology Transactions Group.Lawrence focuses his practice on technology transactions and licensing matters. His diverse experience includes advising on SaaS agreements, cross-licensing agreements, research and collaboration agreements, development agreements, and distribution agreements. He counsels a broad range of companies across the software, hardware, life sciences, biotech and FinTech spaces, as well as other entities including universities.He advises clients in connection with general corporate matters including contract negotiations, and leasing and technology placement agreements.Lawrence also serves as co-editor of <a href="https://www.sociallyawareblog.com/" target="_blank">Socially Aware</a>, the firm’s award-winning newsletter and blog devoted to the law and business of social media, and regularly publishes on various IP and technology-related topics.Prior to joining the firm, Lawrence was counsel at another major law firm. Before earning his law degree, Lawrence was a web consultant, project manager, and web developer in Portland, Oregon, where he managed and consulted on projects using industry methodologies and performed custom development and integration of content management systems.Lawrence was named a Super Lawyers “Rising Star” in 2015 and 2018–2022, and is licensed in both California and New York. Lawrence earned his J.D. from the University at Buffalo School of Law, where he was the electronic systems editor for the Buffalo Law Review and awarded the ABA-BNA Award for Excellence in the Study of Intellectual Property Law.

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Anthony Ramirez is a partner in the Technology Transactions Group in the New York office of Morrison Foerster.Anthony advises clients on general commercial and transactional matters. He regularly advises companies on the IP aspects of their M&A transactions. His clients include technology, digital media and content for television and music, financial services, and communications companies with diverse intellectual property assets and issues.His practice focuses on the legal aspects of developing, licensing, and commercializing technology and intellectual property, as well as negotiating general commercial contracts, including outsourcing transactions, as well as content and data licenses. He regularly assists clients with legal issues relating to licensing and commercialization of digital media and content, digital content that is distributed over the Internet or streamed, mobile applications and social media, as well as the licensing of recorded music for distribution via digital platforms. Anthony is also experienced with issues relating to open-source software, software development, artificial intelligence and machine learning, cloud-based technology, and protection of proprietary information.Anthony has extensive experience working on matters involving disruptive technologies, such as blockchain. He has helped fintech clients with general intellectual property issues in connection with terms of service for online financial products and services.Anthony is an integral part of the outside pro bono legal team for nonprofit organizations based in New York, including advising clients on legal issues regarding entertainment, social media, privacy rights, and the negotiation of outsourcing and service agreements. Anthony received his J.D. from the University of Michigan Law School in 2009. He received his B.S. from Cornell University in 2004.

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Anthony Ramirez is a partner in the Technology Transactions Group in the New York office of Morrison Foerster. He advises clients on general commercial and transactional matters. His clients include technology, media, and communications companies with considerable intellectual property assets. His practice focuses on the legal aspects of licensing and commercializing technology and intellectual property, as well as negotiating general commercial contracts. He also regularly assists clients with legal issues relating to mobile applications and social media.

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Socially Aware is devoted to the law and business of social media, proactively addressing emerging issues and keeping our clients informed of new developments. We cover fields such as artificial intelligence, privacy and data security, Section 230, intellectual property, and much more.

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When the Securities and Exchange Commission lifted the ban on general solicitation and general advertising for private offerings of securities, can marketing blitzes on Twitter and other social media sites be far behind?It is not likely that we will see hedge funds aggressively touting investments on Twitter, or on bus shelters or milk cartons any time soon, because federal regulations will limit what issuers can say in these media.  Even then, hedge funds and other issuers will want to proceed cautiously, because they must comply with specific rules designed to prevent fraud.Lifting the ban on general solicitation.  For decades, start-ups, hedge funds and other companies seeking capital could only solicit investors in private offerings.  These issuers could only publicly offer their shares if they registered such shares with the SEC.  Further, commingled funds could only publicly offer their shares by registering with the SEC under the Investment Company Act.  In either case, registration involved significant capital, disclosure, reporting and operational restrictions that start-ups and hedge funds found prohibitive.The Jumpstart Our Business Startups Act (JOBS Act), which Congress enacted in April 2012,  ordered the SEC to relax the ban on general solicitation and general advertising in certain private offerings.  Among other things, this law required the SEC to adopt rules to allow issuers to make a general solicitation of investors, and to advertise, without registering with the SEC.On July 10, 2013, the SEC published regulations implementing the JOBS Act’s mandates to ease the ban on general solicitations.  While this development is welcome news to start-ups and small hedge funds that want new investors but can’t afford the costs of registering with the SEC, the rules come with some important catches.  Most notably, issuers relying on the new exemption can only sell shares to “accredited investors,” that is, investors that meet minimum annual income or net worth thresholds.  They must also file with the SEC “Form D,” which contains specific information about the issue and the issuer.General Advertising. The SEC proposed rules that would require issuers to disclose prominently certain warnings in “any written communication that constitutes a general solicitation or general advertising” of any offering that relies on the new exemption from registering shares with the SEC.  Social media entries and blogs fall squarely within this category, thus creating compliance challenges for issuers that want to find investors in social media.  For example, all issuers must disclose in all written communications and advertising that:<ul><li>the securities may be sold to “accredited investors;”</li><li>the securities are being offered in reliance on an exemption from the registration requirements of the federal securities laws and thus do not have to comply with those disclosure requirements;</li><li>the SEC has neither passed upon the merits nor approved the offering;</li><li>the securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and</li><li>the investment involves risk.</li></ul>To be sure, it will be difficult to cram these disclosures into a 140 character tweet.Private funds.  Private funds, such as hedge funds and private equity funds, must also disclose that the offering is not subject to the protections of the Investment Company Act, which regulates investments in mutual funds, ETFs and other registered pooled investment vehicles.  Further, private funds that want to mention performance would also be required to disclose, in any written communication, that, among other things:<ul><li>performance data represents past performance;</li><li>past performance does not guarantee future results;</li><li>current performance may be lower or higher than performance data presented;</li><li>the private fund is not required by law to follow any standard methodology when calculating and representing performance data;</li><li>the performance of the private fund may not be directly comparable to the performance of other funds; and</li><li>investors can call a phone number or visit a website for more current performance data.</li></ul>The SEC believes that private funds should be subject to the same rules for advertising and written communications that apply to mutual funds, whether or not the private funds rely on the exemption from registration.The SEC is watching.  The SEC will monitor general solicitations, general advertising and social media entries posted by issuers, including private funds.  This area is fertile ground for SEC enforcement proceedings.  Accordingly, you should proceed with cautiously when discussing private offerings, especially in social media, where cramming in all required disclaimers may be difficult.Federal securities regulators have published guidance for issuers, investment advisers, broker-dealers and investment companies that use social media. You can listen to our presentation about use of social media by investment advisers, broker-dealers and investment companies by clicking here.

Private Funds on Social Media—Proceed with Caution

When the Securities and Exchange Commission lifted the ban on general solicitation and general advertising for private offerings of securities, can marketing bl

Private Funds on Social Media—Proceed with Caution

For several months, various legislative proposals that would ease regulatory and financing burdens on smaller companies have been discussed by legislators, business leaders and commentators. These proposals were brought together under the <a href="http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606pcs/pdf/BILLS-112hr3606pcs.pdf">Jumpstart Our Business Startups (JOBS) Act (H.R. 3606)</a>. The JOBS Act was passed by Congress on March 27, 2012 and signed into law by President Obama on April 5, 2012. For a comprehensive overview of the JOBS Act, see our Client Alert.The JOBS Act tackles various issues relating to financing businesses, however, within the realm of social media, “crowdfunding” is a key topic which Congress has chosen to regulate. In this article, we take a close look at the crowdfunding component of the new law.Background on Crowdfunding “Crowdfunding” or “crowdsourced funding” is a new outgrowth of social media that provides an emerging source of funding for ventures. Crowdfunding works based on the ability to pool money from individuals who have a common interest and are willing to provide small contributions toward the venture. Crowdfunding can be used to accomplish a variety of goals (e.g., raising money for a charity or other causes of interest to the participants), but when the goal is commercial in nature and there is an opportunity for crowdfunding participants to share in the venture’s profits, federal and state securities laws will likely apply. Absent an exemption from SEC registration (or actually registering the offering with the SEC), crowdfunding efforts that involve sales of securities are in all likelihood illegal. In addition to SEC requirements, those seeking capital through crowdfunding have had to be cognizant of state securities laws, which include varying requirements and exemptions. By crowdfunding through the Internet, a person or venture can be exposed to potential liability at the federal level, in all 50 states, and potentially in foreign jurisdictions. Existing exemptions present some problems for persons seeking to raise capital through crowdfunding. For example, Regulation A requires a filing with the SEC and disclosure in the form of an offering circular, which would make conducting a crowdfunding offering difficult. The Regulation D exemptions generally would prove too cumbersome, and a private offering approach or the intrastate offering exemption is inconsistent with widespread use of the Internet. Section 25102(n) of the California Corporations Code might provide a possible exemption for some California issuers, given that it permits general announcement of an offering without qualification in California (with a corresponding exemption from registration at the federal level provided by SEC Rule 1001, the California limited general solicitation exemption). Crowdfunding advocates have called on the SEC to consider implementing a new exemption from registration under the federal securities laws for crowdfunding. For more on crowdfunding, see also our prior Client Alert here.When H.R. 3606 was adopted in the House of Representatives, the bill included Title III, titled “Entrepreneur Access to Capital.” This Title provided an exemption from registration under the Securities Act for offerings of up to $1 million, or $2 million in certain cases when investors were provided with audited financial statements, provided that individual investments were limited to $10,000 or 10 percent of the investor’s annual income. The exemption was conditioned on issuers and intermediaries meeting a number of specific requirements, including notice to the SEC about the offering and the parties involved with the offering, which would be shared with state regulatory authorities. The measure would have permitted an unlimited number of investors in the crowdfunding offering, and would have preempted state securities regulation of these types of offerings (except that states would be permitted to address fraudulent offerings through their existing enforcement mechanisms).The House measure also contemplated that the issuer must state a target offering amount and a third-party custodian would withhold the proceeds of the offering until the issuer has raised 60 percent of the target offering amount. The provision also contemplated certain disclosures and questions for investors, and provided for an exemption from broker-dealer registration for intermediaries involved in an exempt crowdfunding offering.After it was adopted, the House crowdfunding measure drew a significant amount of criticism, with much of that criticism focused on a perceived lack of investor protections. In a letter to the Senate leadership, SEC Chairman Mary Schapiro noted that “an important safeguard that could be considered to better protect investors in crowdfunding offerings would be to provide for oversight of industry professionals that intermediate and facilitate these offerings,” and also noted that additional information about companies seeking to raise capital through crowdfunding offerings would benefit investors.In the Senate, an amendment to H.R. 3606 submitted by Senator Merkley and incorporated in the final JOBS Act provides additional investor protections in crowdfunding offerings. Title III, titled “Crowdfunding,” amends Section 4 of the Securities Act to add a new paragraph (6) that provides a crowdfunding exemption from registration under the Securities Act. The conditions of the exemption are that:<ul><li>The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000;</li><li>The aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, does not exceed: <ul><li>the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or</li><li>10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;</li></ul></li><li>The transaction is conducted through a broker or funding portal that complies with the requirements of the exemption; and</li><li>The issuer complies with the requirements of the exemption.</li></ul>Among the requirements for exempt crowdfunding offerings would be that an intermediary:<ul><li>Registers with the SEC as a broker or a “funding portal,” as such term is defined in the amendment;</li><li>Registers with any applicable self-regulatory authority;</li><li>Provides disclosures to investors, as well as questionnaires, regarding the level of risk involved with the offerings;</li><li>Takes measures, including obtaining background checks and other actions that the SEC can specify, of officers, directors, and significant shareholders;</li><li>Ensures that all offering proceeds are only provided to issuers when the amount equals or exceeds the target offering amount, and allows for cancellation of commitments to purchase in the offering;</li><li>Ensures that no investor in a 12-month period has invested in excess of the limit described above in all issuers conducting exempt crowdfunding offerings;</li><li>Takes steps to protect privacy of information;</li><li>Does not compensate promoters, finders, or lead generators for providing personal identifying information of personal investors;</li><li>Prohibits insiders from having any financial interest in an issuer using that intermediary’s services; and</li><li>Meets any other requirements that the SEC may prescribe.</li></ul>Issuers also must meet specific conditions in order to rely on the exemption, including that an issuer file with the SEC and provide to investors and intermediaries information about the issuer (including financial statements, which would be reviewed or audited depending on the size of the target offering amount), its officers, directors, and greater than 20 percent shareholders, and risks relating to the issuer and the offering, as well specific offering information such as the use of proceeds for the offering, the target amount for the offering, the deadline to reach the target offering amount, and regular updates regarding progress in reaching the target.The provision would prohibit issuers from advertising the terms of the exempt offering, other than to provide notices directing investors to the funding portal or broker, and would require disclosure of amounts paid to compensate solicitors promoting the offering through the channels of the broker or funding portal.Issuers relying on the exemption would need to file with the SEC and provide to investors, no less than annually, reports of the results of operations and financial statements of the issuers as the SEC may determine is appropriate. The SEC may also impose any other requirements that it determines appropriate.A purchaser in a crowdfunding offering could bring an action against an issuer for rescission in accordance with Section 12(b) and Section 13 of the Securities Act, as if liability were created under Section 12(a)(2) of the Securities Act, in the event that there are material misstatements or omissions in connection with the offering.Securities sold on an exempt basis under this provision would not be transferrable by the purchaser for a one-year period beginning on the date of purchase, except in certain limited circumstances. The crowdfunding exemption would only be available for domestic issuers that are not reporting companies under the Exchange Act and that are not investment companies, or as the SEC otherwise determines is appropriate. Bad actor disqualification provisions similar to those required under Regulation A would also be required for exempt crowdfunding offerings.Funding portals would not be subject to registration as a broker-dealer, but would be subject to an alternative regulatory regime, subject to SEC and SRO authority, to be determined by rulemaking. A funding portal is defined as an intermediary for exempt crowdfunding offerings that does not: (1) offer investment advice or recommendations; (2) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (3) compensate employees, agents, or other persons for such solicitation or based on the sale securities displayed or referenced on its website or portal; (4) hold, manage, possess, or otherwise handle investor funds or securities; or (5) engage in other activities as the SEC may determine by rulemaking.The provision would preempt state securities laws by making exempt crowdfunding securities “covered securities,” however, some state enforcement authority and notice filing requirements would be retained. State regulation of funding portals would also be preempted, subject to limited enforcement and examination authority.The SEC must issue rules to carry out these measures not later than 270 days following enactment. The dollar thresholds applicable under the exemption are subject to adjustment by the SEC at least once every five years.The provisions of this title of the JOBS Act are not self-effectuating, as indicated above.Practical Considerations Issuers: For those issuers who are seeking to raise small amounts of capital from a broad group of investors, the crowdfunding exemption may ultimately provide a viable alternative to current offering exemptions, given the potential that raising capital through crowdfunding over the Internet may be less costly and may provide more sources of funding. At the same time, issuers will need to weigh the ongoing costs that will arise with crowdfunding offerings, in particular the annual reporting requirement that is contemplated by the legislation. Moreover, it is not yet known how much intermediaries such as brokers and funding portals will charge issuers once SEC and SRO regulations apply to their ongoing crowdfunding operations.Intermediaries: Brokers and potential funding portals will need to consider how their processes can be revamped to comply with regulations applicable to exempt crowdfunding offerings, in particular given the level of information that will need to be provided in connection with crowdfunding offerings and the critical role that intermediaries will play in terms of “self-regulating” these offerings.

The JOBS Act Opens Door for Crowdfunding Offerings

For several months, various legislative proposals that would ease regulatory and financing burdens on smaller companies have been discussed by legislators, busi

The JOBS Act Opens Door for Crowdfunding Offerings