The consistent and rapid rise of social media, namely TikTok, YouTube, and other video-sharing platforms, has brought with it a flood of financial content. Especially since the markets have surged following the short-lived crash in March 2020, many people have jumped into the investing game. Any many of those same people have enjoyed some pretty substantial gains in the meantime.
With so many amateur (and professional!) creators out there, there’s no shortage of financial tips, tricks, and recommendations. And almost all of them make a point to quickly warn their viewers that their often very persuasive content is “not financial advice” and is for “entertainment purposes only.”
But does that cut it? Does simply saying that something is not financial advice mean that it isn’t financial advice? And why would that matter anyways? Can someone get in trouble for posting financial recommendations online?
Or, put another way, when does entertainment from financial creators become financial advice?
This article will attempt to answer that question, looking mainly at what U.S. law and the SEC have to say about it.
Before we dive into this article together, I might as well remind you that this blog article is not legal advice. This will be a broad overview of U.S. federal law, mostly ignoring state nuances. It’s not financial advice either. And the same goes for any of my other content, whether in video or the written word. Go get your own advice since I don’t know your situation. There – now I should be covered!
Anyways, let’s explore this issue. It all starts with a fundamental question: what is financial advice?
What is Financial Advice?
In order to figure out what you can say, we have to figure out what you can’t say.
The Great Depression, and the speculative mania that preceded it, inspired a series of sweeping financial regulations. The first of those was the Securities Act of 1933, followed by the Securities Exchange Act of 1934. These laws generally govern the sale of securities, like stocks and bonds, in an effort to increase transparency for investors.
The main goal of these acts was to try and prevent the greater public from being exposed to illegitimate and fraudulent investment “opportunities.” By requiring registration before issuing securities and investment products to the public in many cases, ideally, the public would be less likely to get financially burnt.
Some years later, Congress passed the Investment Company Act of 1940 and the Investment Advisers Act of 1940. The latter of those two sweeping reforms is most relevant for defining what is, in fact, “financial advice.”
In short, the Investment Advisers Act tells you what you can’t say without registration. Let’s take a look.
Investment Advisers Act of 1940
The Investment Advisers Act of 1940 is the key federal law for figuring out who can and can’t give financial advice.
Like the laws passed some years earlier, the goal of the Investment Advisers Act of 1940 was to prevent the greater public from harming themselves financially, this time by limiting the distribution of poor financial advice.
By forcing “Investment Advisers,” as defined by the Act, to register, this would ideally create some sort of quality control against people giving harmful advice.
Whether you believe the law is effective towards that goal is irrelevant – you just want to know what financial advice is and who the heck has to register for it.
And our answer lies largely in the definitions section.
How the Act Defines “Investment Adviser”
Investment advisers are subject to the substantial punishments for violating the act, so how “investment adviser” is defined is critical.
Here’s the full definition of “Investment Adviser” under the Investment Adviser Act of 1940:
“‘Investment adviser’ means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include (A) a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956, which is not an investment company, except that the term ‘investment adviser’ includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser; (B) any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession; (C) any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor; (D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation; (E) any person whose advice, analyses, or reports relate to no securities other than securities which are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which shall have been designated by the Secretary of the Treasury, pursuant to section 3(a)(12) of the Securities Exchange Act of 1934, as exempted securities for the purposes of that Act; (F) any nationally recognized statistical rating organization, as that term is defined in section 3(a)(62) of the Securities Exchange Act of 1934, unless such organization engages in issuing recommendations as to purchasing, selling, or holding securities or in managing assets, consisting in whole or in part of securities, on behalf of others; (G) any family office, as defined by rule, regulation, or order of the Commission, in accordance with the purposes of this title; or (H) such other persons not within the intent of this paragraph, as the Commission may designate by rules and regulations or order.” Sec. 202 [80b-2] (a)(11) of the Investment Advisers Act of 1940, as amended January 3, 2019
In short, the term “investment adviser” includes anyone who advises someone else as to the value or advisability of investing in securities and gets paid for it.
But what’s a security? Well, “Security” has its own definition under the Act, and it includes “any note, stock, treasury stock, security future, bond, debenture . . . investment contract . . . any put, call, straddle, option, or privilege on any security,” among many other common (and less common) investments.
So if someone tells someone that a stock is worth buying at a particular price, that person is an investment adviser under the general definition, right?
Not so fast; remember, the person has to advise others for compensation to be an investment adviser. But what does that mean?
The “For Compensation” Requirement
If someone directly pays someone for financial advice, that’s very clearly “for compensation.”
But what about more nuanced cases? What about a YouTuber who makes ad revenue on his or her investing related content?
The SEC defines “for compensation” very broadly to mean “Generally, the receipt of any economic benefit, whether in the form of an advisory fee, some other fee relating to the total services rendered, a commission, or some combination . . ..”
And the person who receives the advice “may” pay the compensation, and currently is not explicitly required to be the one paying the potential adviser.
It follows that someone making ad revenue, affiliate commissions, or some other income through a finance YouTube channel or social media account could be considered doing so “for compensation” as defined under the Act. Though it isn’t entirely clear.
Although it might not be sufficient in reality, for our purposes, we’ll assume that a financial YouTuber making ad revenue on his or her content is enough to satisfy the “for compensation” requirement.
OK, so if someone tells someone that a stock is worth buying at a particular price, and somehow gets paid for it, that person is an investment adviser, right?
Hold on – there are some broad exceptions to the definition of “investment adviser” listed in subsections (A) through (H) of Section 202(a)(11) of the Act. Let’s review some of the key ones now and see how they might apply to financial creators and influencers.
Exceptions to the Investment Advisers Act
The Investment Advisers Act states that “any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession” is not an Investment Adviser.
“Great!” a humble creator might exclaim. “I run an ‘education’ channel talking about stocks, after all, so I’m covered under the teacher exception!”
Slow down there – it’s not quite so simple.
Giving financial advice must be “solely incidental” under the exception. The SEC has stressed this on numerous occasions.
A channel devoted entirely to financial topics probably isn’t giving advice in a “solely incidental” sense. It’s the literal purpose of the channel!
Thus, for a financial YouTuber, it’s unlikely that he or she would fall under this definition. Instead, the next exception seems far more relevant.
The Publisher’s Exclusion
This exception states that “the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation” is not an Investment Adviser under the Act.
This exception is often called the “publisher’s exclusion.”
Simply put, Subsection D of the definition of investment adviser seems to have the most promise for a financial YouTuber or creator. We’ll return to this point later.
For now, let’s go over a major case that helped to clarify this exception.
Lowe v. SEC and the Publisher’s Exclusion
Way back in 1985, in Lowe v. SEC, 472 U.S. 181, the United States Supreme Court clarified this carve out.
In Lowe, Mr. Lowe had previously been convicted of various financial crimes, so the SEC revoked his business’s registration under the Investment Adviser’s Act. Shortly thereafter, Lowe started publishing a paid, semi-monthly newsletter that gave investment advice and commentary. The SEC brought suit against him, arguing that he was violating the Act as an unregistered investment adviser. The case made its way to the Supreme Court.
The Supreme Court found in favor of Lowe. The Court concluded that, to qualify for the publisher’s exclusion, the publication must meet the following conditions:
- The publication is general and impersonal in nature;
- It is “bona fide” or genuine, rather than promotional material;
- The publication is of general and regular circulation.
After an intense look at the legislative history behind the Investment Adviser’s Act, the court reasoned that “Congress was primarily interested in regulating the business of rendering personalized investment advice, including publishing activities that are a normal incident thereto. On the other hand, Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of non-personalized publishing activities.” [emphasis added]. The Court supported “a broad reading of the exclusion for publishers.”
Lowe’s newsletters were “completely disinterested” and “were offered to the general public on a regular schedule” within the plain language of the exclusion.
More precisely, Lowe’s “publications [did] not fit within the central purpose of the Act because they [did] not offer individualized advice attuned to any specific portfolio or to any client’s particular needs. On the contrary, they circulate[d] for sale to the public at large in a free, open market—a public forum in which typically anyone may express his views.”
At the same time, there was no evidence that the newsletters were false, misleading, or otherwise designed to promote a security that Lowe and his partners were invested in.
So Lowe was allowed to publish his newsletter without having to register as an investment adviser.
The SEC routinely cites Lowe in clarifying its application of the publisher’s exclusion.
A Broad Exclusion
This exception seems to give creators pretty broad latitude to publish financial content.
However, we have yet to see a Supreme Court case or an SEC publication explicitly waiving a financial content creator’s registration requirement under the publisher’s exemption. While it seems promising, it is by no means a guaranteed out.
But, there’s one more major exception we should take a moment to discuss: intent.
“Intent” is the catch all in subsection H of the definition of Investment Adviser.
The Act states that “other persons not within the intent of [the definition], as the Commission may designate by rules and regulations or order,” do not need to register.
One could argue, especially given the Lowe decision and subsequent SEC clarifications, that a YouTuber creating honest financial content wouldn’t fall under the intent of the Act. After all, if someone distributing a financial newsletter, as in Lowe, isn’t required to register, why would someone who creates videos on the same topics?
That would seemingly go against the intent of the Act.
That said, the SEC’s intent can change with the times, as can the law more generally. But, with the current body of law, it seems like a stretch to assume that the current regulatory regime intends to include social media creators and not someone distributing a newsletter.
Other Exceptions to the Investment Advisers Act of 1940
The exceptions we’ve covered are not all encompassing. The Act lists a number of other exceptions, including banks, broker dealers giving advice incidental to their practice, and family offices (think Bill Hwang).
These other exceptions aren’t particularly relevant for this exercise, so I won’t go into detail here.
That said, given what we now know, let’s discuss whether social media influencers are financial advisers under the Act.
Financial Advice Over Social Media
When Entertainment Becomes Advice
So, we return to our initial question: when does so called “entertainment” from financial creators become financial advice?
It seems likely that a YouTube channel talking about finance topics, including investing in stocks, would fall under the publisher’s exclusion discussed above.
So the channel creator seemingly wouldn’t have the register under the Act.
That’s because a YouTube channel’s content is typically “of general and impersonal nature,” is “of general and regular circulation, in that it is not timed to specific market activity or to events affecting . . . the securities industry, and should contain only “disinterested commentary and analysis as opposed to promotional material.”
However, a channel could easily violate those SEC guidelines if it, say, promotes a small, illiquid stock that the creator has an interest in to try and pump (and dump) the stock. It would be hard to call that anything but promotional, assuming it’s not straight up securities fraud.
A creator might likewise run into hot water if the person gives specific advice to an individual viewer in his or her video, perhaps during a livestream where a viewer asks a personal investing question. The content must remain “general and impersonal” to avoid triggering the registration requirement.
What About Dave Ramsey?
Wait a second, doesn’t Dave Ramsey have viewers call in about their specific financial problems, and he gives them advice on how to address them? And he often tells those callers to invest in mutual funds along with using other specific financial strategies.
Isn’t that giving financial advice that would trigger the registration requirement?!
Despite his show’s disclaimer that it’s not financial advice, it seems clear that Mr. Ramsay is giving those callers personal advice. Though one could certainly argue that the calls are for entertainment and not advice, since callers are likely prepped before going on air that it is not supposed to be personal advice for them.
It’s potentially thin reasoning, but it’s something.
And, technically, the caller him or herself is not paying for the advice. Sure, Mr. Ramsey is making money on the call, but not by selling advice to that specific person. Rather, he receives money via advertising revenue and product sales on the back end by airing the show. We briefly discussed that this might not be enough to satisfy the “for compensation” requirement under the Investment Adviser’s Act of 1940.
Unfortunately, there isn’t a hard and fast rule. This is more of a legal gray area than anything else. We have yet to see a YouTuber or financial creator like Dave Ramsay get in serious trouble under the Investment Adviser’s Act. But that’s no guarantee that things won’t change in the future.
What About Crypto?
Especially over the past year, a substantial number of social media personalities have promoted various cryptocurrency projects. Are they liable under the Investment Advisers Act?
Remember, to be considered an “Investment Adviser,” you have to advise on “Securities.”
So now the question becomes, “Are cryptocurrencies securities?”
The answer to this question is still unclear. The SEC has given the unsatisfactory answer of “it depends.” Though it wouldn’t be surprising if cryptocurrencies eventually are more often deemed “Securities” under the Investment Advisers Act of 1940.
Even if cryptocurrencies are deemed “Securities” under the Act, the same analysis noted above would apply. Is that social media influencer giving non-personal recommendations? Is the influencer being paid? And so on.
As the cryptocurrency markets expand and mature, one would expect more laws and regulations passed in an effort to curb fraud and other wrongdoings. Time will tell.
Is there a chance that a financial YouTuber could be liable under the Investment Advisers Act of 1940? Well, yes. Does it mean that it’s likely? Well, no, though it completely depends on what exactly the creator is doing.
If the YouTuber is giving personal advice to individual viewers, that would be hard to defend under the Act.
Similarly, if a YouTuber charges an exclusive membership fee to certain viewers and personally encourages each of them to invest in particular stocks, then the Feds might have a much easier time nailing down a charge.
But, in any event, these are broad generalities. Every individual case warrants its own analysis. What might look like unregistered financial advice under the Act in one case might be totally fine in another.
And if you’re a creator wondering if you’re potentially on the hook for something, go speak with an attorney.
Until the SEC offers more clarity on specific situations where social media creators give financial recommendations, there’s no way to say with 100% certainty that there won’t be trouble ahead. Though the SEC hasn’t done much of anything to this point to curb the army of financial creators on social media.
Realize that many things under the law are on a spectrum of gray in between the black and white. Something may inch closer to financial or investment advice without actually breaking the critical threshold. And a court may rule one way in one case and completely differently in another, similar case.
And this is before we even dive into state-level nuances that might exist.
Above all, honesty is the key to avoiding trouble with the SEC. If a creator lies about his or her position in a security, or produces fake research in an effort to manipulate a stock’s share price, or commits any sort of fraud, he or she is heading straight for trouble. No SEC law permits fraud, whether the person is registered or not.
Nevertheless, in the words of Richard Coffin, the one and only Plain Bagel, “stay safe out there.”
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