As the SEC looks to reform its disclosure requirements – using “materiality” as the North Star as SEC Chairman Paul Atkins recently noted in a speech – it got me thinking about the judicial interpretation of materiality harkening back to the Supreme Court’s TSC Industries v. Northway and Basic v. Levinson definitions: “a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote/invest.”
Pulling from those cases, the question is not: “Would someone care about this?” – but rather the question is: “Is there a substantial likelihood that a reasonable investor would view the information as having significantly altered the total mix of information available?”
So who is a “reasonable investor”? It depends on the context – so this standard would be applied differently from someone who has invested in a speculative biotech startup versus a mature utility company versus a SPAC during peak de-SPAC season. Investors in each would reasonably expect different types of risk and volatility.
My question is whether the context differ when the investor is an AI agent making the investment choices for you? It’s true that algorithms have long helped professional investors make their trading decisions for decades. Those algos have been programmed for those investors. Does it matter if retail investors begin to more directly rely on algos – in the form of AI agents that are freely available – to decide how to trade? My guess is probably not if those investors have made the conscious decision to select and rely on those AI agents.
Still, it’s worth posing the question because when it comes to how various judges decide securities law cases, the biggest difference between judges isn’t how they define the reasonable investor, it’s how they conceptualize what a particular investor understands about business risk, assumes about corporate optimism and expects in terms of disclosure precision.
Some judges implicitly assume the reasonable investor is market-savvy, aware that companies are optimistic and are familiar with industry volatility. But some don’t. Will those that don’t change their view if an unsophisticated investor has access to AI agents that are sophisticated and have all those traits? Does access to AI agents level the playing field between unsophisticated and sophisticated investors?
It’s an interesting set of questions as I’ve read a lot about how AI levels the playing field in the workplace as we all get access to the same level and depth of knowledge in a way that wasn’t true with mere access to Google. The same might be said that the playing field has been leveled when it comes to making investment decisions.
I’m interested in hearing your thoughts. And I asked John Jenkins of TheCorporateCounsel.net who said: “When AI gets to the point in the near future where it is being used by most investors to make buying, selling and voting decisions, I think that can’t help but influence what courts think about the characteristics of the “reasonable investor.” If that standard is measured by reference an infinitely sophisticated entity with greater intelligence than Einstein and with access to all public information on the internet, then I think that’s also going to have a pretty dramatic impact on the way courts approach materiality determinations.”
