Can't stop, won't stop... GameStop (NYSE:GME)? Part one: Securities regulation of Australian internet discussion sites

It is safe to say that publishing an article about a video-game retailer headquartered in the United States, GameStop Corp. (NYSE:GME) (GameStop) and its part in an online quasi-revolution by retail investors turned keyboard rebels, against Wall Street hedge funds was not a foreseeable event for an Australian law firm in 2021. However, given what has happened in 2020, anything is possible. 

Without repeating the narrative that has dominated global news cycles in the last week, stock in GameStop (the parent company of Australia’s EB Games) has rocketed from less than US$20 each in early-mid January 2021 to an all-time intraday high of US$483 on 28 January 2021. This meteoric rise in price has largely been attributed to a combination of:

1. a large increase in the volume of long positions taken by retail traders, originating from discussions on a Reddit discussion thread ‘WallStreetBets’ (WSB). An underlying theme of WSB appears to be that members hold the stock with “diamond hands” (that is, not sell their positions, which of course has the practical effect of reducing the number of stock publicly circulating and able to be purchased by hedge funds looking to close their “short” positions);
2. a “short squeeze” — where those hedge funds who had sold GameStop stock short (speculating on a decline of the stock price) in excess of the number of shares in the hands of public investors, are forced to scramble when the price climbs to cover their positions by buying stock at a higher price from an increasingly limited pool, which in turn drives up the stock price; and
3. a “gamma squeeze” — in addition to trading the underlying stock of GameStop, investors are able to also buy option contracts from market makers whose role is to provide liquidity in the market. As the option contracts are leveraged derivatives, meaning that practically speaking, both gains and losses are magnified, market makers will also purchase a portion of the underlying stock in order to protect their position from directional risk. If the share price approaches the strike or exercise price of those options, market makers will purchase more of the underlying stock as a hedge. A “gamma squeeze” occurs where large volumes of “out-of-the-money” options have been issued and the price of the underlying stock rises towards the strike or exercise price of the relevant options resulting in further purchases of the underlying stock. 

The motivations for the long positions taken by the WSB retail investors appear varied and range from the complex (a measure of revenge against Wall Street for events such as the Global Financial Crisis) to the simple (with investment thesis such as: “we like the stock” and “GME to the Moon” running rife on the WSB thread). It raises interesting questions around the regulation of securities trading in the context of internet discussion sites (IDS) like Reddit or HotCopper. 

In this article (the first of a series), Michele Muscillo and Luke Dawson discuss the regulatory mechanisms currently in place in Australia in respect of the use of IDS relating to Australian equities. 

Regulation of Australian internet discussion sites 

The Australian securities regulator, ASIC, has longstanding regulatory guidance (Regulatory Guide 162 or RG 162) in place in respect of Australian IDS. The intention of ASIC is that its policy should only apply to an Australian IDS, being a site that targets people in Australia or operates within Australia. 

Whether an IDS is Australian is generally able to be ascertained easily (e.g. where it is operated from Australia or mainly discusses securities issued by entities regulated by Australian securities laws), however given the global reach of the internet, this may not always be apparent. 

The policy position taken by ASIC in RG 162 attempts to balance three public policy concerns:

1. the value in people being able to communicate freely with one another; 
2. the value in permitting an inexpensive and easy way for consumers to better inform themselves about securities and developments in securities markets; and
3. the need to promote consumer protection and market integrity by minimising the risk that an IDS may be used for market manipulation, insider trading and other abuses, or allow people to take advantage of consumers through the use of asymmetric information. 

The regulatory burden of compliance is greater for those IDS which are deemed to be providing financial product advice (e.g. those who publish newsletters or other forms of advice in respect of securities) and therefore require an Australian Financial Services Licence (AFSL), when compared to those which merely provide a forum for persons not engaged in the provision of financial services to discuss their experiences and opinions as investors. 

In essence, RG 162 broadly allows the operation of an Australian IDS provided that the site complies with relevant ASIC guidelines such as ensuring that:

1. people who view information on an Australian IDS are properly informed about the nature of the information on it, including through the use of disclaimers that the information should not be relied upon or treated as investment advice and that the Australian IDS operator does not endorse or vouch for the accuracy or authenticity of posts; and
2. people who post information on an Australian IDS are aware of their responsibilities, namely that:

• they are personally responsible for their postings and therefore should not include any misleading or deceptive information and not carry out illegal or unauthorised activities using the IDS; and
• if they own or have some other interest in the securities of a company that they disclose that fact.

In addition, an Australian IDS operator must, amongst other matters:

1. advise ASIC if they propose to operate within the IDS guidelines before they commence operation; 
2. ensure that any advertising or promotional material relating to financial products or services is clearly recognisable as such material;
3. give ASIC access, as far as relevant laws allow, to archived member information and postings whenever ASIC asks for it;
4. have reasonably adequate procedures and mechanisms to:

• identify people making or altering postings on the IDS; and
• review regularly the content of the IDS; and
• promptly remove any content reasonably regarded as likely to be misleading or deceptive or to amount to illegal or unauthorised activities; 

5. ensure that it maintains adequate record keeping of the identities and posts of users.

The above regime is in addition to any remedies a person or entity may have at general law against an Australian IDS, e.g. defamation claims for statements made and posted on an Australian IDS.

There are a number of examples where applications have been made for Court orders (pre-action discovery) to obtain the details of users of an Australian IDS in reliance on the requirements of RG 162, which appear to suggest the regulatory regime in Australia is working. However, as always there is a lag between the speed at which technology progresses and how legislation and policy is made and enforced. ASIC must continue to innovate to deal with new challenges as they arise. 

The GameStop saga is not yet over, but it will be interesting to see what, if any, action is taken by securities regulators in the United States over the battle that is currently being waged between retail investors and institutional investors. 

Stay tuned for the second part in this series of articles — Don’t Hate the Player, Hate the GameStop (NYSE:GME) — Part Two: a case of mistaken identity? 

If you require further advice, please contact our Corporate Advisory and Governance team.