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When Posting an Emoji Is a Securities Violation

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Emojis are a common and valid form of modern expression, but like any other form of speech, companies need strict policies and procedures around their use. Don’t believe that? Ask the SEC about rocket ship and money bags emojis. Theta Lake’s Susannah Hammond breaks down a recent NFT-related court ruling and what it means for companies across all industries.

When is a rocket ship not a rocket ship? When it is cited in a legal case alleging a firm and its control person violated U.S. securities laws by offering for sale to the public NFTs without filing the required registration statement with the SEC.

In a recent court filing, a judge ruled that the use of emojis in a tweet by NBA Top Shot to promote an NFT amounted to an investment contract despite the tweet never using the word “profit.” The use of emojis was specifically called out as meaning there was an expectation of profit for the NFT issuance, which was then deemed to be an investment contract — known as the Howey Test. Although “profit” was not used in any of the tweets, emojis representing a rocket ship, stock chart and money bags all mean one thing — the expectation of a financial return on investment. 

The tweets in question

The Howey Test

In the U.S., the Securities Act prohibits persons from offering, selling or delivering by means of interstate commerce any security unless a registration statement has been filed with the SEC. The Securities Act’s definition of a security is broad and includes an investment contract within the definition.

The Howey Test refers to the U.S. Supreme Court case for determining whether a transaction qualifies as an investment contract and, therefore, would be considered a security and subject to disclosure and registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934. Under the Howey Test, an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” 

As in this instance, the Howey Test is important for blockchain and digital currency projects as certain cryptocurrencies and initial coin offerings (ICOs) may be found to meet the definition of an investment contract under the Howey Test. There are four criteria to determine whether an investment contract exists. 

The court’s conclusion that what the organization offered was an investment contract under Howey was narrow; it was made clear that not all NFTs offered or sold by a company will necessarily constitute a security, and each scheme must be assessed on a case-by-case basis. 

Emojis are a form of communication

Beyond this particular case, it’s important to remember that while emojis are an inherent part of modern communications, they must, in a business context, be treated with the same care as every other form of communication or messaging. The use of emojis to illustrate or emphasize a point is commonplace, and organizations need to be aware that the same rules apply to communication by emojis as with all other communications. 

That brings the risks associated with communications in terms of misleading content, investor protection, dissemination of potentially material non-public information, as well as the challenges of capturing (preserving and being able to retrieve) the full context of an emoji-laden conversation.  Equally, there are potential issues with emojis being used overly casually within a firm with the potential for collusion, misconduct and other socially unacceptable behaviors. 

Firms need to ensure that emojis are expressly covered in not only the suite of preventive and detective controls in place as part of the governance framework but also in the guidance given to employees on all forms of communication. Prevention is better than cure, and the best method of prevention is often education. Regular training on the regulatory and compliance expectations around all forms of communication (emojis expressly included) is a good way to keep the message fresh and provide an audit trail. The example of emojis being cited in a legal case leading to the conclusion that an offering was in breach of securities law would make an excellent example for any training program.

A potential challenge for firms is the ability to robustly capture emojis (and GIFs, edits, reactions and deletions) in their original context so that the meaning of any communication is apparent in both retrieval and surveillance. Most firms have solutions that can capture emails. Less common is the capability to capture all elements and combinations of communications, though that is having to change fast as unified communications platforms cement their place as part of the working infrastructure of organizations. It is that comprehensive level of capture, preservation and retrieval which is essential as part of a modern, risk-aware approach to governance, risk and compliance. 

Though the use of emojis triggered the Howey Test in this case, they are inherently neither good nor bad — they are simply another form of communication which firms need to ensure is within their organization-wide strategic approach to data management. 

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