Monthly Archives: August 2014


July 2014 preliminary returns: -1.6%

February returns were updated to +4.1% from the previous estimate of +3.9% due to the timing of a large cashflow.

Performance statistics are preliminary and unaudited. Returns are presented net of all expenses and fees, including accrued but unpaid performance fees. The Cable Car Composite includes all accounts Cable Car manages on a fully discretionary basis. The performance of individual client accounts can vary significantly from the performance of the composite. The timing of cash flows, the size and type of account, the fee arrangement, and the availability of investment opportunities for each account may lead to divergence from composite returns. Past performance may not be predictive of future results.


Facebook ads violate the Securities Act

Disclosure: No position in FB.

Other Facebook ads are well-intentioned, but they nevertheless violate securities law.

In my last post — Is Facebook overmonetizing mobile ads? — I highlighted some of the more egregious examples of stock promotion Facebook allows on its platform. That is not the only advertising Facebook runs in potential violation of securities law. On a somewhat lighter note, I’d like to point out how a well-intentioned fundraising campaign and a handful of Germans having fun at my expense further demonstrates the need for Facebook to better police its advertising platform.

With the popularity of crowdfunding, in 2012 the JOBS Act contained a provision that would legalize ‘crowdinvesting’ — exempt offering of small equity interests in startups to the general public. Although the risk of abuse seems high, the chance to participate in the upside of a new business would be an improvement for investors who otherwise might receive only a t-shirt from a successful Kickstarter campaign. One could perhaps be forgiven for thinking that after two years, the law had already been implemented and that US investors could freely buy shares of startups through crowd platforms. Unfortunately, that is not the case. Until the SEC completes its rulemaking procedures, general solicitation of US investors remains illegal. Outside of a handful of states with specific exemptions for local, intrastate businesses, advertising is not allowed. The SEC issued proposed rules in October 2013 but has yet to finalize them.

Enter Seedmatch. Seedmatch is a German company pioneering the concept of crowdinvesting, offering ownership stakes in startups starting at 250 €. Investors in Seedmatch companies receive a security that is analogous to participating preferred stock. Seedmatch receives a 5-10% commission from successful placements. It’s a good business model, and assuming the underlying startups are reasonably well-vetted and not trying to deceive anyone, it probably makes the world a better place. However, that does not make it legal for Seedmatch to jump the gun and advertise in the United States. At present Seedmatch is only open to investors with a German bank account, but they still are not allowed to advertise to US residents.

Facebook once again knows a lot about me, including that I spent 4 months working in Wiesbaden, Germany. Although my Aufenthaltserlaubnis has long since expired, conceivably I could still have a German bank account. I do not, but quite frankly a part of me wishes I did, as a couple of the startups look pretty intriguing. I guess advertising works. Facebook shows me ads like this on both desktop and mobile:


Translation: This startup wants to make it possible for private users to have the IT security of large organizations — and you can invest in it for as little as 250 Euros!

Now, I’m not sure if Seedmatch even knows their ads are being shown in the US. After all, there aren’t that many German speakers here. The most likely scenario would seem to be that Seedmatch restricted the ad’s geography to Germany, but Facebook’s algorithm is including former residents as well as current ones. That seems like it should be an easy fix. Although perhaps something more nefarious is going on, and Facebook is trying to milk a few extra impressions out of its ads. In any case, the ads are not legal in the US. Seedmatch doesn’t even conform to the proposed JOBS Act rules, as some of its campaigns exceed $1 million, and users are allowed to invest without income limitations. I couldn’t resist being ‘that guy’ and trying to at least let someone know on an ad for Bonaverde, which in addition to Seedmatch already ran a successful Kickstarter campaign in the US. I guess the money raised in the US was “revenue” that accrues for the benefit of the German follow-on investors. I also wanted to practice my German, which is getting a bit rusty:


Translation: Why am I seeing this ad in the US? Technically that’s not allowed by law. You have a great idea, but I’d encourage you to be careful! Daniel: What does advertising have to do with the current location? What law is being broken?


Translation: The Securities Act. You can’t offer investment opportunities like this to US investors. Although it appears you need a German account, ads like this would generally not be allowed in the US. This German company probably doesn’t know that the ad is being shown in California, in violation of local law.

Benjamin Schmitz then offers this rejoinder: “Wait a minute…just now an American is complaining about the use of his personal information without prior authorization?!” Ha ha. That’s what I get for commenting on a public Facebook post.

Germans take their online privacy very seriously. I don’t expect Facebook to any time soon. But I do expect it to start paying a bit more attention to securities law on its advertising platform.


Is Facebook over-monetizing mobile ads? 3

Disclosure: No positions in FB or any of the penny stock scams mentioned here.

Facebook should really stop accepting advertising dollars from paid stock promoters.

Facebook’s ability to target ads to its users’ interests is the key reason for its success as an advertising platform, although lately it seems like the company is overdoing it. In its relentless effort to tie advertisements to whatever information a user makes available, some mistakes are inevitable — I haven’t played the trumpet in years, but I still see ads for valve oil — but for the most part the targeting is uncanny. Unsurprisingly, as an investment adviser I see a lot of ads related to investing on my personal Facebook page. Some of them stem from retargeting based on websites I have visited (no doubt Covestor would rather not pay for my impressions, a separate weakness of retargeting), yet for the most part Facebook has done an admirable job of intuiting my interest in investing from relatively passive, infrequent use of the platform.


I am writing this post because rather than just run-of-the-mill mutual fund solicitations and ads from research firms, Facebook has increasingly been showing me ads from paid stock promoters. In my opinion, paid stock promotion is unethical, dangerous, and entirely inappropriate for the general public on a social network. Promoters target unsophisticated retail investors with insinuations of easy riches and extraordinary growth prospects in questionable businesses operating on legal fringes, such as marijuana dispensing. Needless to say, many of the investments being highlighted in this way are penny stocks with little or no intrinsic value, potentially manipulated securities, or pump-and-dump schemes designed to separate the uninformed from their money. You should be extremely skeptical of any investment that is the subject of paid promotion. It is a dark side of the stock market, and I expect better from a platform like Facebook than to enable it.

Stock promotion is already borderline illegal and the subject of SEC concerns. Given format constraints, ads on a mobile platform are particularly unlikely to conform with the stringent legal disclaimers promoters are required to include in their ads. Stock promotion also contravenes several of Facebook’s own advertising guidelines.1 I told them as much on their abuse reporting form, but the ads have continued. So, this is my attempt to publicize the practice and encourage Facebook to end it.

The ads excerpted in this post were shown intermittently on a mobile device between May and August of this year.


GrowBLOX is purportedly in the marijuana cultivation business, an “exploding” and “booming” industry. The promoter questionably claims to have performed weeks of in-depth analysis.


This misleading chart does not specify the company in question (not GBLX), and the blurry footnote reads, amusingly, “these calculations may not be 100% accurate but are close.”

 


Ignoring the Priceline canard, does nearly illegible text at the bottom of a mobile ad conform to disclosure rules?


Other ads in the promotion, such as this sponsored press release, do not include any disclaimer at all.

 


Contrast GBLX above with this disclaimer on another campaign. At least the promoter is relatively upfront.


Some viewers of ads make a valiant effort to push back against stock promotion, although many comments (paid?) cheer it on.

 


This ad contains a misstatement of fact. According to FactSet, there are 2,849 companies trading on the OTC BB that had positive net income in their most recent reporting period.


It continues with a thinly veiled recommendation to purchase securities. The background information does not disclose whether this specific report was paid for.

In short, not only are stock promoters advertising on Facebook, but several of the ads fail to properly disclose the authors’ interests in the subject securities or receipt of compensation from the subject companies. At a minimum, Facebook should stop running these ads, which appear to violate the law. Better yet, Facebook should stop enabling the distasteful practice of stock promotion altogether.


1 Stock promotion, in particular of marijuana companies, appears to violate several of Facebook’s own advertising guidelines. Facebook gives itself broad discretion not to run ads that violate its overall philosophy. Other than its desire to show growth in mobile advertising revenues, I have trouble thinking of any reason why Facebook would not exercise its discretion here. Provisions violated include:

  • Ads for regulated goods and services (e.g. alcohol and gambling), must abide by all applicable laws, regulations, and industry codes.
  • Advertisers must ensure that their ads comply with all applicable laws, regulations and guidelines.
  • All claims in ads must be adequately substantiated.
  • Ads must not offend users. (Is it enough that I’m offended?)
  • Ads and any offers promoted within ads must not be false, deceptive or misleading or contain spam.
  • Ads must not contain or promote illegal products or services.
  • Ads may not promote or facilitate the sale or consumption of illegal or recreational drugs, tobacco products, or drug or tobacco paraphernalia.
  • Ads may not promote a business model or practice that is deemed by Facebook in its sole discretion to be unacceptable or contrary to Facebook’s overall advertising philosophy or to any applicable law, including but not limited to multi-level marketing schemes, or advertisements for scams.
  • Ads may not constitute, facilitate or promote illegal activity.