While celebrities and lifestyle gurus are perhaps most known for hawking beauty aids, diet fads, and healthcare and wellness products, they have increasingly turned to promoting investment strategies.

Their recommendations are taken to heart by Generation Z – those born between 1997 and 2012 – who are notoriously leery of traditional institutions. For example, a September 2023 poll by Gallup indicated that 40% of Gen Z has “very little” trust in the news, and that there is significantly more trust in information found online.

Rise of the finfluencer

Multiple sources have confirmed the rise of alternative wellsprings of authority: online influencers, or finfluencers as they are known in the investment space. FINRA’s Investor Education Foundation recently commissioned a study on Gen Z investing trends, which indicated that a significant number of Gen Z investors relied most heavily on social media as the source of information about investing and finances, (followed by internet searches and websites).

Some 30% of Gen Z investors sought information from influencers; approximately the same amount as from financial companies or finance professionals. And over a third listed social media influencers as a factor motivating their investment decisions.

“Equity ownership has, for many, become less a means of obtaining a return on investment than a form of social identity.”

This reliance on social media for investment advice has led to some concerning results. For some issuers, share prices remain divorced from economic fundamentals, and are instead bolstered by social media campaigns that have rendered them “meme stocks” – traded at far higher prices than would be dictated by any rational analysis. Equity ownership has, for many, become less a means of obtaining a return on investment than a form of social identity and signifying membership in an internet-based tribe. 

As social media becomes the means by which that identity is constructed, it should be no surprise that a growing amount of investment decisions appear to be driven not by review of financial reports, or recommendations by investment firms, but by promotions online by these so-called “finfluencers.”

Regulatory fines

In reaction to the growing influence of finfluencers, regulators have stepped up their game. The first cases brought by the SEC were in 2018 against social media touters, including boxer Floyd Mayweather and music impresario DJ Khaled, who promoted Initial Coin Offerings (ICOs) on their social media platforms, without disclosing that they were compensated for doing so.

The SEC found that this ICO promotion violated the prohibition in Section 17(b) of the Securities Act against promoting securities without disclosing the receipt and amount of any compensation for doing so.

This initial enforcement action was followed by additional settled administrative cases against other celebrities for touting cryptocurrencies on their social media feeds, including Kim Kardashian in 2022, and then Lindsay Lohan, Jake Paul, Soulja Boy and others, in 2023.

These cases were followed by several others involving firms’ use of finfluencers. In late 2022, the SEC brought charges against a group of stock manipulators who used platforms like Twitter and Discord to urge social media followers to purchase certain securities, which the wrongdoers would then sell, for the social media incarnation of the classic pump-and-dump scheme.

In 2023, the SEC filed settled charges against Fundrise Advisors, LLC, an investment advisor, for hiring hundreds of finfluencers to solicit clients, without requiring them to provide required disclosures. Then, in February 2024, the SEC brought settled charges against Van Eck Associates Corporation, relating to a failure to fully disclose a social media influencer’s role in connection with its launch of a fund, levying a $1.75 million penalty.

The SEC is not the only securities regulator to be concerned about the influence of social media on investment decisions. FINRA, for example, recently fined a trading platform that offers self-directed trading through both a website and mobile app, for misleading social media posts made by finfluencers it had hired to promote the firm.

Not only were the posts misleading, but the firm had failed to review them before they were made, in violation of FINRA rules. This case was the first (but probably not the last) case to result from an industry-wide sweep conducted by FINRA to investigate the extent to which member firms were hiring social media influencers to promote their products and services.

Private litigants

Private litigants are also bringing claims based on social media statements. In one example, meme stock investor Ryan Cohen was sued for securities fraud by investors in now-bankrupt Bed Bath and Beyond for an alleged pump-and-dump scheme involving that company’s stock.

In that case, Cohen was alleged to have expressed a favorable opinion about the stock while selling his interests in it. The manner in which that purportedly favorable opinion was expressed? Not with a statement about the company’s financial results, or predictions about next year’s earnings. No – with a social media post of a smiling moon emoji.

The allegation was that investors relied upon this post as a prediction that the price of Bed Bath and Beyond shares were headed “to the moon.” The Complaint survived a motion to dismiss, and might be heading to trial.

Given the increasing role that Gen Z investors will play in markets as they accumulate more investable wealth, and that cohort’s likely growing reliance on finfluencers and social media for investment direction, it is likely that concerns over what these investors are told will only grow – as will the response of regulators and enforcement authorities.

It is unlikely that the constraints of a short TikTok video or Instagram post will suffice to fully communicate the potential risks and rewards of a particular investment vehicle, which is only likely to lead to increased use of these platforms to mislead, rather than to inform.

While regulators might prefer investors to rely on traditional communications instead, it is likely too late to alter the habits that Gen Z investors are developing. Indeed, not only is that cat out of the bag, there is probably also a video of it with over a million views.