February 12, 2025 • 22 mins
In this episode, lawyer Richard Hoeg delves into the complexities surrounding Roblox, its platform, and the recent scrutiny it faces. He begins with an overview of Roblox's popularity and the criticisms it has attracted. The discussion then shifts to the SEC's investigation into Roblox, explaining securities and the implications of Bloomberg's reporting on child safety. Richard also examines short selling, focusing on Hindenburg Research's report and its potential impacts on Roblox. The episode further explores user screening, COPPA implications, and the importance of transparency in ongoing investigations, concluding with closing remarks and audience engagement.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:14):
Hello, and welcome to another episode ofVirtual Legality.
I'm your host, Richard Hogue, managing memberof the Hogue Law Business Law Firm of
Northville, Michigan.
And today, we're gonna talk about a video gamethat honestly, I don't think we talk about
enough in this space.
And that game is Roblox.
If you aren't familiar with it, it isessentially a platform of experiences that
other developers outside of the Roblox companymake to play within Roblox as a platform, which
(00:40):
makes it a somewhat unique type of game in thespace.
But it's also become very, very popular.
A lot of people have made content for thisplatform.
A lot of people have experienced that content,and a lot of people have made a lot of money,
Which is one of the reasons why we have talkedabout Roblox in virtual reality before because
when this company went public, when peoplestarted digging into how folks were making
(01:01):
money through making content for this platform,the question became, is Roblox exploiting those
developers?
Is it exploiting those people that are makingcontent for it because it's becoming so
wealthy, it's making so much money from peoplegaining access to these various experiences,
but it isn't paying these people as employees?
This question became even more prominent forRoblox when folks started talking about the
(01:23):
fact that it was so popular with children andthat many of its developers of content and
experiences on the Roblox platform were in factchildren themselves.
And I did that episode in virtual reality acouple of years ago.
You can check it out now.
You can see the comments to that where peoplewere maybe not as thrilled with me as possible
for not decrying Roblox's corporate structureincentives and also not decrying capitalism on
(01:47):
the whole.
But I'll leave that to you to interpret foryourself.
What I wanted to talk about today was a story Isaw reported on in game developer that really
raised my eyebrows, which says, SEC confirmsthat Roblox is part of an active and ongoing
investigation.
Now they also sub headline this as the focus ofthe investigation remains unclear, but I wanted
(02:08):
to investigate this article.
I wanted to see what was happening behind thescenes of what's reported here, and I wanted to
talk to you all about it because I don't thinkit is as obvious what is happening here as
these articles would suggest.
So game developer says, Roblox is part of anactive investigation being conducted by US
regulator, the Securities and ExchangeCommission, SEC.
(02:30):
Now importantly here, the Securities andExchange Commission is focused, as you might
expect, on securities.
Now if that term doesn't mean anything to you,I don't blame you.
Securities are in essence the way that peoplegive money to corporations or other entities to
do things.
Now that can often take place in a stock marketthrough the exchange of money for stock, but it
(02:52):
can also take place as loans for the lending ofmoney for bonds or promissory notes or what
have you.
So when you think of stocks and bonds, that'sreally what we're aimed at with securities.
It becomes more complicated.
When we talk about cryptocurrencies and otherthings that may or may not be securities,
there's actually ongoing fights about thatbehind the scenes.
But what's important to note here is that theSecurities and Exchange Commission is focused
(03:13):
on stocks, bonds, and what investors learnabout companies so that the markets for those
stocks and bonds are as fair and transparent aspossible.
As reported by Bloomberg, and we'll get to thatarticle in just a minute, the SEC confirmed
Roblox is involved in an active and ongoinginvestigation, but refused to elaborate
further, and that's to be expected.
If they are involved in an activeinvestigation, that's one of the areas where if
(03:36):
you go and you ask for information from afederal agency, they can say, look.
We don't have to give you any information aboutanything that's ongoing because we don't wanna
jeopardize what that investigation entails.
Responding to that Freedom of Information Actrequest, the SEC said providing additional
information could harm our ongoing enforcementproceeding.
Bloomberg has been unable to learn more aboutthe investigation.
(03:56):
Roblox owner, Roblox Corp, has yet to respondto a request for comment from Bloomberg, while
the SEC declined to provide more context.
Roblox is no stranger to headlines.
The platform which allows users to build andplay video game experiences has faced heavy
criticism over a perceived lack of childprotections.
You say, Rick, you just told me that the SEC isonly interested in securities and transparency
(04:17):
to investors.
It is indeed.
But the more sexy headlines for Roblox, theones that really kinda get the clicks that I
see on my timeline all the time are is Robloxexploitative?
Is it allowing things like child predatorsaccess to children through the platform?
And so this article, and we'll see theBloomberg article that is its basis, dovetails
(04:37):
from SEC is reporting that there's an activeinvestigation to the platform has a problem
with child safety pretty quickly.
And I wanted to talk about that because I don'tthink that's actually what's in play here.
Continuing on with this article, the companyhas cut moderation costs in an attempt to
appease Wall Street while endangering kids witha platform that exposes them to illicit
content, etcetera, claims a specific report.
(05:00):
Once again, Roblox Corp rejected theseallegations and claimed the report was
inaccurate.
Now we have more research to do though becausethat's obviously just a summary article of
another article.
We're already two levels in the playingtelephone on this particular topic.
Let's go see what Bloomberg had to say itself.
So they say much the same thing in theirheadline.
SEC says game service Roblox is part of anactive investigation and that the agency
(05:23):
withholds details.
That's all to be expected, but let's see whatthey say.
Roblox Corp, the video game service used bymillions of young people is part of an active
investigation by the US Securities and ExchangeCommission.
Again, remembering that the SEC, the USSecurities and Exchange Commission, not so
interested in what's happening with youngpeople, not interested in enforcing criminal
laws for protection of young people.
(05:43):
We'll see that writ large when we get to theactual federal websites as part of this video,
but that is kind of the hook for this article.
It's the hook for why you should be concernedwith Roblox, and I think it's a little bit
unfair reporting in this context.
Responding to that Freedom of Information Actrequest, the commission said in a letter Friday
that it couldn't share correspondence betweenstaffers referencing Roblox, saying it could
(06:04):
cause harm to the ongoing enforcementproceeding.
We have confirmed with division of enforcementstaff that there are responsive emails between
enforcement staff referencing Roblox and thatthese emails are part of that active and
ongoing investigation, the commission said, butBloomberg News couldn't confirm the subject of
the investigation.
Hunterbrook Media reported in November thatRoblox was under investigation by the SEC,
(06:25):
citing their Freedom of Information Act or FOIArequests.
And more importantly for our conversation rightnow, in October, the now defunct short seller
Hindenburg Research published a report on childsafety concerns at Roblox and also alleged that
the company had inflated its metrics, includingthe number of users who regularly play Roblox
games and the amount of time they spend onaverage on the platform.
(06:46):
So we're two articles in.
We're halfway through the second article, buthere is the first time we see why the SEC might
be interested in this company.
And that is to say the SEC is interested inmaking sure that if you are a publicly traded
company that is selling its stocks and havingthose stocks sold amongst your investors, that
you are transparent with all of the metricsthat go into valuing your company.
(07:06):
And so if somebody accuses you of inflatingyour metrics, including your number of users
and the amount of time they spend on yourservice, that's the kind of thing that raises
the SEC's eyebrows.
It's the kind of thing that can make anenforcement action take place.
We totally reject the claims made in thereport, a Roblox spokesperson said at the time.
The authors are admittedly short sellers andhave an agenda irrespective of the substance of
(07:28):
Roblox business model and results.
And if you aren't familiar with the phraseshort sellers, these are the folks that operate
in a stock market betting against the company'svalue going up.
That's the most easy way to understand who theyare.
That's what short selling means.
Mechanically, it means that they essentiallysign contracts with other parties that say, we
(07:49):
can sell you 10,000 shares of this company orwhatever other number makes sense at the price
it is today, and you have to buy them from us,at some point in the future.
And if the stock price goes down, we can buy upthose shares when it goes down, and we can sell
them to you at the higher price, and we makemoney, and that's how our business model works.
Obviously, if the stock price goes up, that's aproblem for us because we then have to buy
(08:10):
those shares anyway, and we lose money on thatsame transaction.
That's what a short seller does.
And so what Roblox is saying here in thecontext of this statement is, look, it is in
their best interest to try to drive our stockprice down.
That's how they make money.
So we don't have to take this report as comingfrom a completely unbiased source, and that
makes all the sense in the world.
But again, Bloomberg continues on this trackputting aside the transparency issues and
(08:34):
starts talking about those children's safetyissues.
The video game company has faced scrutiny overchildren's safety on the platform.
Since 2018, at least two dozen people have beenarrested by police in The US, accused of
abusing or abducting victims they've met orgroomed using Roblox, Bloomberg News reported
in July.
In 2024, Roblox implemented at least 40 safetychanges to its platform, including barring
(08:55):
children under age 13 from participating insocial chatting games.
And if that 13 concept rings a bell to you, youmight have watched some of our COPPA videos
here in Virtual Reality where we talk about theCOPPA law and the COPPA rule, applying data
protection privacy considerations to childrenunder the age of 13, 12 year olds and under.
Shares of Roblox fell 11% on Thursday after thecompany reported slower than expected growth in
(09:20):
daily users of its service.
So this is the Bloomberg article that givesrise to all that, but I want to also talk about
the Bloomberg article that talks about thatinitial report on what Roblox is doing and why
they should be concerned.
So here's a market report from Bloomberg lastOctober that says Roblox tumbles as Hindenburg
bets against gaming platform.
You you heard them reference this company asnow defunct.
(09:42):
The Hindenburg Reports project actually windsup disbanding earlier this year.
I don't know that that has anything to do withRoblox in particular, but it is worth noting
that this short seller didn't actually survive.
Hindenburg said in its report that Roblox hasinflated key metrics and alleged that it
doesn't have sufficient safety screens toprevent pedophiles from using the platform.
And then we get that statement where Robloxsays we reject the claims and the authors are
(10:05):
short sellers.
Roblox's share price is strongly associatedwith user growth and engagement.
Over the last few years, the platform has seenmassive growth with chief executive officer
Dave Baszewski now aiming for a goal of1,000,000,000 daily active users.
Currently, Roblox reports 80,000,000 userslogging on to the platform every day.
This is not a minor company.
This is not a small piece of the video game pieeven if you might not otherwise engage in
(10:29):
Roblox or Fortnite or any other platforms thatsee a lot of success from kind of niche
audiences in gaming.
Hindenburg's report accuses the company ofinflating both the number of users who
regularly play Roblox games and the amount oftime they spend on average on the platform.
And then we get a little information on thesystems that they use to determine that those
metrics were in error according to them.
(10:50):
Further analysis of playtime showed numerousgames in which obvious bot accounts remained in
game for more than twenty four hours straight,and we've seen bots and platform metrics being
confused by bots be an issue in virtual realitybefore.
Here now, also with respect to Twitter when wewere discussing Elon Musk's takeover purchase
of that company, our representative sampleflagged millions of zombie engagement hours
(11:12):
that can majorly skew Roblox's reported averageengagement.
And that's important because if you're abusiness and you're selling currency or
cosmetics to people that are otherwise engagedon your service, it doesn't help your business
to have bots doing those things, but it canhelp it look like there's more possible sales
opportunities if you've got those numbers thatyou report to investors.
So that is a problem.
(11:32):
Right?
If there are a lot of zombie accounts, if thereare metrics that are not rightfully saying how
successful your platform actually is, ifinvestors can't get the right information to
know what to value your company at, That isgoing to be a problem for regulators in The
United States.
Over the past four quarters, Roblox bookings,etcetera, there's a bunch of numbers here.
It's a Bloomberg report article.
(11:52):
On user safety, the report cites a recentBloomberg Businessweek investigation into
predatory behavior on Roblox that was based oninterviews with more than 20 current and former
employees.
This continues on from what we saw discussed inthat original article saying, hey, they might
have issues here.
Most of the safety workers interviewed byBloomberg Businessweek said it was harder to
pursue pedophiles at Roblox than in otheronline platforms In part, because the company
(12:14):
allows users to create an account withoutentering any real names, email addresses, or
phone numbers.
And I wanted to point this particular paragraphout to you all because this is kind of the dark
side of something like a COPPA rule, which saysyou can't collect personal information from
kids.
One of the ways to try to solve this is you saywe're not gonna collect any information from
anybody.
Right?
If we're gonna get in trouble from knowing thatthere are kids on our platform and not doing
(12:37):
enough to satiate you, we saw this in thevirtual reality video I did on Genshin Impact
very recently, then maybe we're just gonna sayno information from anybody.
We're gonna avoid all of that.
And then the opposite end of that is theysafety workers say we can't track adults doing
bad things.
We can't track these issues for our safetybecause we're not collecting any of this real
information.
(12:57):
Hindenburg's report raised concerns with thelack of screening upon sign up.
The researchers created multiple fake accountsas children and found they were quickly exposed
to sexual content.
All this is bad.
Right?
This is a short seller.
They wanna say these are the reasons why thiscompany could face liability, could face
exposure, could just face negative publicinterest in the very near future if all of this
is happening behind the scenes.
(13:18):
Roblox's partnership with big brands includingWalmart, L'Oreal, and Nike alleviate our
concerns, says this Bloomberg analysis, aboutbrand safety, but it may still need to invest
in parent controls and cleaning up bots.
And this I thought was interesting because thisis the way the real world works.
You lean on people that otherwise have a stronginvestment, a strong incentive to police for
(13:38):
bad actors.
So you look at Nike, you look at Walmart, youlook at these big companies and you say, we are
disinclined to think this is a major problembecause all of these big companies that have
all this big money invested in partnershipswith this company would have looked at it
themselves.
Obviously, that falls apart at the end state ifeverybody says, well, everybody else is looking
at things.
(13:59):
We've seen that with big investments.
We've seen that in in venture capital.
We've seen that in other places whereessentially everybody assumes that everybody
else is doing due diligence and you get into aposition where things are very bad.
But there's no indication just from thisarticle that that is in fact the case with
Roblox even if there is this one short sellerreport that suggests that it might be a
(14:19):
problem, which all leads us to understandingwhat is happening here today when they say the
SEC is reviewing things.
First, I wanna talk about FOIA.
If you aren't familiar with Freedom ofInformation Act concepts, it is a statute in
The United States that says, look.
The federal government is only given power andauthority by the people.
It is a function of the people.
It's a democracy, and so the people should beable to go and ask its government that has tens
(14:44):
of thousands of people doing all these thingsacross the geography of the country what it is
that they are doing.
And so there's a statute that says, you cansend them a letter, you can ask them to give
you this information on what it is that they'redoing.
You generally have to give a search term.
Tell me everything that you've ever said aboutRoblox.
That's how these things look.
Mostly they're used by journalists or otherpolitical activists in The United States, but
(15:04):
that's what a Freedom of Information Actrequest means.
You might also hear FOIA as a term related tostate government or other more local or
municipal governments in The United States.
Generally speaking, there are laws in eachstate and in each location that have something
like this concept.
You owe us a certain amount of transparency.
Some constitutions of various states even havethat included directly therein.
(15:27):
But they aren't usually FOIA.
FOIA is just used as a term that's essentiallyshorthand for, I'm gonna send a letter and ask
for my government to give me this information.
That's what FOIA means, but there areexceptions.
The most notable of which I have highlighted onour screen right now that says you can't ask
for information that could reasonably beexpected to interfere with enforcement
proceedings.
(15:47):
There's other exceptions to FOIA such aspersonal data about various people working
within the government, other things that couldotherwise jeopardize or endanger people
individually.
But the one that we're interested in right nowis if it could reasonably be expected to
interfere with enforcement proceedings, then wecan reject your FOIA request.
Now that's important because the government ismade up of people just like these corporations,
(16:09):
just like the journalists that look at thesestories.
So when they say at the SEC, we're not gonnahand over this information because it could
harm an ongoing investigation, it's importantto understand that that's one of the categories
that they can claim.
It's very difficult for us to check because wecan't see the underlying information on the
outside, and governments have been known to usesome of these exceptions a little over broadly
(16:31):
in order to avoid complying with FOIA requests.
Now we have no reason to believe in thisparticular story that the SEC would be taking
any special steps to try to protect Roblox frombad press or itself from bad press, but we do
also have to acknowledge the politicalsituation, which is that we are engaged in an
administrative transition to a new presidency.
There's a lot of noise around a lot of agenciesthat probably don't wanna get involved too much
(16:53):
in public with anything, especially on a techside when you have everything happening on
social media right now.
So we do have to at least note that this is oneof the areas where they can say we can't give
you that information and really the journalist,Bloomberg, anybody else doesn't have the
ability to tell them that they're wrong rightnow.
Which is also to say that as the FOIA websitehere says, it's important to get the right
(17:16):
agency when you're asking for these questions.
So Bloomberg knew from November that somebodywas claiming that the SEC was investigating
this company, so they knew to ask the SEC.
But as the FOIA website itself says, it'simportant that you identify the correct agency
for your request.
There are over 100 federal agencies and each isresponsible for handling its own FOIA requests.
You can use our search tool.
(17:37):
You may search for a specific agency here,etcetera.
But this is where I wanted to talk about thevarious agencies that could come into play here
just from what we've seen discussed in theBloomberg article.
So first, we start with the SEC.
The SEC's mission is to protect investors, notusers, not consumers, not children, the people
that are giving money to Roblox Corporation.
That's who the SEC is designed to protect.
(17:58):
And in that case, they're designed to protectit through forcing transparency and accuracy in
the reports that that company makes.
They are to maintain fair, orderly, andefficient markets and facilitate capital
formation.
So if you don't like capitalism, these are theguys you also don't like, the SEC.
But in general, they are not interested in halfof what the Bloomberg article and the game
developer article say, and that doesn't meanthat they don't care about children being safe
(18:22):
or pedophilia or anything else.
Every good hearted person wants to keep thechildren safe and out of harm's way.
But the SEC, like any other federal agency,only has the authority given to it by Congress.
And in this case, the SEC is only investigatingthings related to investor protection,
transparency, and maintaining fair, orderly,and efficient markets.
If you're interested in children's safety, youmight ask someone like the FTC.
(18:45):
We've seen them discussed in virtual legalitybefore.
Here's a copy of the children's online privacyprotection rule as promulgated by the FTC.
This is what protects children's data or issupposed to protect children's data and FTC
actions in lawsuit land or otherwise seek toenforce this rule to protect children's data.
Otherwise, you might be interested if you'reinterested in the exploitation side of things
(19:07):
in checking whether the Department of Labor hasan issue here.
The Department of Labor at the federal level isthe one responsible for enforcing wage and hour
laws, making sure employees are getting paidcorrectly.
If you think something is wrong with the wayRoblox is operating its dev system as we saw in
various YouTube videos a couple years ago and Ithink even continuing now, this is where you
(19:29):
might look to see if a complaint was filed orif you really want to heighten things, you go
and you talk to the Department of Justice.
Right?
The Department of Justice enforces the criminallaws, enforces those laws that protect kids.
Here we have a website that is tips onprotecting kids at home and online.
And the Department of Justice, if they had aninvestigation or they were otherwise interested
(19:49):
in Roblox, might be someone that you asked onthis particular question.
So in answer to whether Roblox is in trouble ornot, if we look at their stock price, it hasn't
really fluctuated based on any of this news.
It did fluctuate a little bit on their earningsreport, which came in a little softer than they
had indicated that was likely, in this mostrecent reporting quarter.
But overall, I think this article about the SECinvestigation sounds like a lot, and it's
(20:14):
certainly being reported on as a lot withrespect to bringing in all the children's
safety complaints and possible issues thatRoblox might have with that in the future.
But the fact that there's an SEC investigationdoes not, to my mind, mean that any of that is
happening behind the scenes at a federalinvestigatory level right this second.
It would surprise me a lot if the SEC wereinvestigating any of those public safety
(20:38):
concerns except in respect of whether or notRoblox is properly reporting on what their
liabilities might be with respect to thosechildren's safety concerns.
So the SEC is confirming they're in an activeand an ongoing investigation.
We've talked about the fact that that benefitsthem from not complying with FOIA requests.
So they might still be in an active ongoinginvestigation.
(20:58):
It might be an investigation that is on itslast legs.
We don't know what it was about becauseBloomberg can't confirm, which is a little bit
of a surprise because Bloomberg Newsundoubtedly has sources with access to the SEC
and other federal agencies.
But overall, if you love Roblox, I don't thinkthis is the end state right now, but it is a
story you are definitely wanna gonna wanna keeptrack of in the immediate future.
(21:21):
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(21:41):
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Virtual Legality is a YouTube video series withaudio podcast versions presented as commentary
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(22:03):
If you have legal questions about the topicsdiscussed, please consult your own legal
counsel.
Hello, and welcome to another episode ofVirtual Legality.
I'm your host, Richard Hogue, managing memberof the Hogue Law Business Law Firm of
Northville, Michigan.
And today, we're gonna talk about a video gamethat honestly, I don't think we talk about
enough in this space.
And that game is Roblox.
If you aren't familiar with it, it isessentially a platform of experiences that
other developers outside of the Roblox companymake to play within Roblox as a platform, which
(00:40):
makes it a somewhat unique type of game in thespace.
But it's also become very, very popular.
A lot of people have made content for thisplatform.
A lot of people have experienced that content,and a lot of people have made a lot of money,
Which is one of the reasons why we have talkedabout Roblox in virtual reality before because
when this company went public, when peoplestarted digging into how folks were making
(01:01):
money through making content for this platform,the question became, is Roblox exploiting those
developers?
Is it exploiting those people that are makingcontent for it because it's becoming so
wealthy, it's making so much money from peoplegaining access to these various experiences,
but it isn't paying these people as employees?
This question became even more prominent forRoblox when folks started talking about the
(01:23):
fact that it was so popular with children andthat many of its developers of content and
experiences on the Roblox platform were in factchildren themselves.
And I did that episode in virtual reality acouple of years ago.
You can check it out now.
You can see the comments to that where peoplewere maybe not as thrilled with me as possible
for not decrying Roblox's corporate structureincentives and also not decrying capitalism on
(01:47):
the whole.
But I'll leave that to you to interpret foryourself.
What I wanted to talk about today was a story Isaw reported on in game developer that really
raised my eyebrows, which says, SEC confirmsthat Roblox is part of an active and ongoing
investigation.
Now they also sub headline this as the focus ofthe investigation remains unclear, but I wanted
(02:08):
to investigate this article.
I wanted to see what was happening behind thescenes of what's reported here, and I wanted to
talk to you all about it because I don't thinkit is as obvious what is happening here as
these articles would suggest.
So game developer says, Roblox is part of anactive investigation being conducted by US
regulator, the Securities and ExchangeCommission, SEC.
(02:30):
Now importantly here, the Securities andExchange Commission is focused, as you might
expect, on securities.
Now if that term doesn't mean anything to you,I don't blame you.
Securities are in essence the way that peoplegive money to corporations or other entities to
do things.
Now that can often take place in a stock marketthrough the exchange of money for stock, but it
(02:52):
can also take place as loans for the lending ofmoney for bonds or promissory notes or what
have you.
So when you think of stocks and bonds, that'sreally what we're aimed at with securities.
It becomes more complicated.
When we talk about cryptocurrencies and otherthings that may or may not be securities,
there's actually ongoing fights about thatbehind the scenes.
But what's important to note here is that theSecurities and Exchange Commission is focused
(03:13):
on stocks, bonds, and what investors learnabout companies so that the markets for those
stocks and bonds are as fair and transparent aspossible.
As reported by Bloomberg, and we'll get to thatarticle in just a minute, the SEC confirmed
Roblox is involved in an active and ongoinginvestigation, but refused to elaborate
further, and that's to be expected.
If they are involved in an activeinvestigation, that's one of the areas where if
(03:36):
you go and you ask for information from afederal agency, they can say, look.
We don't have to give you any information aboutanything that's ongoing because we don't wanna
jeopardize what that investigation entails.
Responding to that Freedom of Information Actrequest, the SEC said providing additional
information could harm our ongoing enforcementproceeding.
Bloomberg has been unable to learn more aboutthe investigation.
(03:56):
Roblox owner, Roblox Corp, has yet to respondto a request for comment from Bloomberg, while
the SEC declined to provide more context.
Roblox is no stranger to headlines.
The platform which allows users to build andplay video game experiences has faced heavy
criticism over a perceived lack of childprotections.
You say, Rick, you just told me that the SEC isonly interested in securities and transparency
(04:17):
to investors.
It is indeed.
But the more sexy headlines for Roblox, theones that really kinda get the clicks that I
see on my timeline all the time are is Robloxexploitative?
Is it allowing things like child predatorsaccess to children through the platform?
And so this article, and we'll see theBloomberg article that is its basis, dovetails
(04:37):
from SEC is reporting that there's an activeinvestigation to the platform has a problem
with child safety pretty quickly.
And I wanted to talk about that because I don'tthink that's actually what's in play here.
Continuing on with this article, the companyhas cut moderation costs in an attempt to
appease Wall Street while endangering kids witha platform that exposes them to illicit
content, etcetera, claims a specific report.
(05:00):
Once again, Roblox Corp rejected theseallegations and claimed the report was
inaccurate.
Now we have more research to do though becausethat's obviously just a summary article of
another article.
We're already two levels in the playingtelephone on this particular topic.
Let's go see what Bloomberg had to say itself.
So they say much the same thing in theirheadline.
SEC says game service Roblox is part of anactive investigation and that the agency
(05:23):
withholds details.
That's all to be expected, but let's see whatthey say.
Roblox Corp, the video game service used bymillions of young people is part of an active
investigation by the US Securities and ExchangeCommission.
Again, remembering that the SEC, the USSecurities and Exchange Commission, not so
interested in what's happening with youngpeople, not interested in enforcing criminal
laws for protection of young people.
(05:43):
We'll see that writ large when we get to theactual federal websites as part of this video,
but that is kind of the hook for this article.
It's the hook for why you should be concernedwith Roblox, and I think it's a little bit
unfair reporting in this context.
Responding to that Freedom of Information Actrequest, the commission said in a letter Friday
that it couldn't share correspondence betweenstaffers referencing Roblox, saying it could
(06:04):
cause harm to the ongoing enforcementproceeding.
We have confirmed with division of enforcementstaff that there are responsive emails between
enforcement staff referencing Roblox and thatthese emails are part of that active and
ongoing investigation, the commission said, butBloomberg News couldn't confirm the subject of
the investigation.
Hunterbrook Media reported in November thatRoblox was under investigation by the SEC,
(06:25):
citing their Freedom of Information Act or FOIArequests.
And more importantly for our conversation rightnow, in October, the now defunct short seller
Hindenburg Research published a report on childsafety concerns at Roblox and also alleged that
the company had inflated its metrics, includingthe number of users who regularly play Roblox
games and the amount of time they spend onaverage on the platform.
(06:46):
So we're two articles in.
We're halfway through the second article, buthere is the first time we see why the SEC might
be interested in this company.
And that is to say the SEC is interested inmaking sure that if you are a publicly traded
company that is selling its stocks and havingthose stocks sold amongst your investors, that
you are transparent with all of the metricsthat go into valuing your company.
(07:06):
And so if somebody accuses you of inflatingyour metrics, including your number of users
and the amount of time they spend on yourservice, that's the kind of thing that raises
the SEC's eyebrows.
It's the kind of thing that can make anenforcement action take place.
We totally reject the claims made in thereport, a Roblox spokesperson said at the time.
The authors are admittedly short sellers andhave an agenda irrespective of the substance of
(07:28):
Roblox business model and results.
And if you aren't familiar with the phraseshort sellers, these are the folks that operate
in a stock market betting against the company'svalue going up.
That's the most easy way to understand who theyare.
That's what short selling means.
Mechanically, it means that they essentiallysign contracts with other parties that say, we
(07:49):
can sell you 10,000 shares of this company orwhatever other number makes sense at the price
it is today, and you have to buy them from us,at some point in the future.
And if the stock price goes down, we can buy upthose shares when it goes down, and we can sell
them to you at the higher price, and we makemoney, and that's how our business model works.
Obviously, if the stock price goes up, that's aproblem for us because we then have to buy
(08:10):
those shares anyway, and we lose money on thatsame transaction.
That's what a short seller does.
And so what Roblox is saying here in thecontext of this statement is, look, it is in
their best interest to try to drive our stockprice down.
That's how they make money.
So we don't have to take this report as comingfrom a completely unbiased source, and that
makes all the sense in the world.
But again, Bloomberg continues on this trackputting aside the transparency issues and
(08:34):
starts talking about those children's safetyissues.
The video game company has faced scrutiny overchildren's safety on the platform.
Since 2018, at least two dozen people have beenarrested by police in The US, accused of
abusing or abducting victims they've met orgroomed using Roblox, Bloomberg News reported
in July.
In 2024, Roblox implemented at least 40 safetychanges to its platform, including barring
(08:55):
children under age 13 from participating insocial chatting games.
And if that 13 concept rings a bell to you, youmight have watched some of our COPPA videos
here in Virtual Reality where we talk about theCOPPA law and the COPPA rule, applying data
protection privacy considerations to childrenunder the age of 13, 12 year olds and under.
Shares of Roblox fell 11% on Thursday after thecompany reported slower than expected growth in
(09:20):
daily users of its service.
So this is the Bloomberg article that givesrise to all that, but I want to also talk about
the Bloomberg article that talks about thatinitial report on what Roblox is doing and why
they should be concerned.
So here's a market report from Bloomberg lastOctober that says Roblox tumbles as Hindenburg
bets against gaming platform.
You you heard them reference this company asnow defunct.
(09:42):
The Hindenburg Reports project actually windsup disbanding earlier this year.
I don't know that that has anything to do withRoblox in particular, but it is worth noting
that this short seller didn't actually survive.
Hindenburg said in its report that Roblox hasinflated key metrics and alleged that it
doesn't have sufficient safety screens toprevent pedophiles from using the platform.
And then we get that statement where Robloxsays we reject the claims and the authors are
(10:05):
short sellers.
Roblox's share price is strongly associatedwith user growth and engagement.
Over the last few years, the platform has seenmassive growth with chief executive officer
Dave Baszewski now aiming for a goal of1,000,000,000 daily active users.
Currently, Roblox reports 80,000,000 userslogging on to the platform every day.
This is not a minor company.
This is not a small piece of the video game pieeven if you might not otherwise engage in
(10:29):
Roblox or Fortnite or any other platforms thatsee a lot of success from kind of niche
audiences in gaming.
Hindenburg's report accuses the company ofinflating both the number of users who
regularly play Roblox games and the amount oftime they spend on average on the platform.
And then we get a little information on thesystems that they use to determine that those
metrics were in error according to them.
(10:50):
Further analysis of playtime showed numerousgames in which obvious bot accounts remained in
game for more than twenty four hours straight,and we've seen bots and platform metrics being
confused by bots be an issue in virtual realitybefore.
Here now, also with respect to Twitter when wewere discussing Elon Musk's takeover purchase
of that company, our representative sampleflagged millions of zombie engagement hours
(11:12):
that can majorly skew Roblox's reported averageengagement.
And that's important because if you're abusiness and you're selling currency or
cosmetics to people that are otherwise engagedon your service, it doesn't help your business
to have bots doing those things, but it canhelp it look like there's more possible sales
opportunities if you've got those numbers thatyou report to investors.
So that is a problem.
(11:32):
Right?
If there are a lot of zombie accounts, if thereare metrics that are not rightfully saying how
successful your platform actually is, ifinvestors can't get the right information to
know what to value your company at, That isgoing to be a problem for regulators in The
United States.
Over the past four quarters, Roblox bookings,etcetera, there's a bunch of numbers here.
It's a Bloomberg report article.
(11:52):
On user safety, the report cites a recentBloomberg Businessweek investigation into
predatory behavior on Roblox that was based oninterviews with more than 20 current and former
employees.
This continues on from what we saw discussed inthat original article saying, hey, they might
have issues here.
Most of the safety workers interviewed byBloomberg Businessweek said it was harder to
pursue pedophiles at Roblox than in otheronline platforms In part, because the company
(12:14):
allows users to create an account withoutentering any real names, email addresses, or
phone numbers.
And I wanted to point this particular paragraphout to you all because this is kind of the dark
side of something like a COPPA rule, which saysyou can't collect personal information from
kids.
One of the ways to try to solve this is you saywe're not gonna collect any information from
anybody.
Right?
If we're gonna get in trouble from knowing thatthere are kids on our platform and not doing
(12:37):
enough to satiate you, we saw this in thevirtual reality video I did on Genshin Impact
very recently, then maybe we're just gonna sayno information from anybody.
We're gonna avoid all of that.
And then the opposite end of that is theysafety workers say we can't track adults doing
bad things.
We can't track these issues for our safetybecause we're not collecting any of this real
information.
(12:57):
Hindenburg's report raised concerns with thelack of screening upon sign up.
The researchers created multiple fake accountsas children and found they were quickly exposed
to sexual content.
All this is bad.
Right?
This is a short seller.
They wanna say these are the reasons why thiscompany could face liability, could face
exposure, could just face negative publicinterest in the very near future if all of this
is happening behind the scenes.
(13:18):
Roblox's partnership with big brands includingWalmart, L'Oreal, and Nike alleviate our
concerns, says this Bloomberg analysis, aboutbrand safety, but it may still need to invest
in parent controls and cleaning up bots.
And this I thought was interesting because thisis the way the real world works.
You lean on people that otherwise have a stronginvestment, a strong incentive to police for
(13:38):
bad actors.
So you look at Nike, you look at Walmart, youlook at these big companies and you say, we are
disinclined to think this is a major problembecause all of these big companies that have
all this big money invested in partnershipswith this company would have looked at it
themselves.
Obviously, that falls apart at the end state ifeverybody says, well, everybody else is looking
at things.
(13:59):
We've seen that with big investments.
We've seen that in in venture capital.
We've seen that in other places whereessentially everybody assumes that everybody
else is doing due diligence and you get into aposition where things are very bad.
But there's no indication just from thisarticle that that is in fact the case with
Roblox even if there is this one short sellerreport that suggests that it might be a
(14:19):
problem, which all leads us to understandingwhat is happening here today when they say the
SEC is reviewing things.
First, I wanna talk about FOIA.
If you aren't familiar with Freedom ofInformation Act concepts, it is a statute in
The United States that says, look.
The federal government is only given power andauthority by the people.
It is a function of the people.
It's a democracy, and so the people should beable to go and ask its government that has tens
(14:44):
of thousands of people doing all these thingsacross the geography of the country what it is
that they are doing.
And so there's a statute that says, you cansend them a letter, you can ask them to give
you this information on what it is that they'redoing.
You generally have to give a search term.
Tell me everything that you've ever said aboutRoblox.
That's how these things look.
Mostly they're used by journalists or otherpolitical activists in The United States, but
(15:04):
that's what a Freedom of Information Actrequest means.
You might also hear FOIA as a term related tostate government or other more local or
municipal governments in The United States.
Generally speaking, there are laws in eachstate and in each location that have something
like this concept.
You owe us a certain amount of transparency.
Some constitutions of various states even havethat included directly therein.
(15:27):
But they aren't usually FOIA.
FOIA is just used as a term that's essentiallyshorthand for, I'm gonna send a letter and ask
for my government to give me this information.
That's what FOIA means, but there areexceptions.
The most notable of which I have highlighted onour screen right now that says you can't ask
for information that could reasonably beexpected to interfere with enforcement
proceedings.
(15:47):
There's other exceptions to FOIA such aspersonal data about various people working
within the government, other things that couldotherwise jeopardize or endanger people
individually.
But the one that we're interested in right nowis if it could reasonably be expected to
interfere with enforcement proceedings, then wecan reject your FOIA request.
Now that's important because the government ismade up of people just like these corporations,
(16:09):
just like the journalists that look at thesestories.
So when they say at the SEC, we're not gonnahand over this information because it could
harm an ongoing investigation, it's importantto understand that that's one of the categories
that they can claim.
It's very difficult for us to check because wecan't see the underlying information on the
outside, and governments have been known to usesome of these exceptions a little over broadly
(16:31):
in order to avoid complying with FOIA requests.
Now we have no reason to believe in thisparticular story that the SEC would be taking
any special steps to try to protect Roblox frombad press or itself from bad press, but we do
also have to acknowledge the politicalsituation, which is that we are engaged in an
administrative transition to a new presidency.
There's a lot of noise around a lot of agenciesthat probably don't wanna get involved too much
(16:53):
in public with anything, especially on a techside when you have everything happening on
social media right now.
So we do have to at least note that this is oneof the areas where they can say we can't give
you that information and really the journalist,Bloomberg, anybody else doesn't have the
ability to tell them that they're wrong rightnow.
Which is also to say that as the FOIA websitehere says, it's important to get the right
(17:16):
agency when you're asking for these questions.
So Bloomberg knew from November that somebodywas claiming that the SEC was investigating
this company, so they knew to ask the SEC.
But as the FOIA website itself says, it'simportant that you identify the correct agency
for your request.
There are over 100 federal agencies and each isresponsible for handling its own FOIA requests.
You can use our search tool.
(17:37):
You may search for a specific agency here,etcetera.
But this is where I wanted to talk about thevarious agencies that could come into play here
just from what we've seen discussed in theBloomberg article.
So first, we start with the SEC.
The SEC's mission is to protect investors, notusers, not consumers, not children, the people
that are giving money to Roblox Corporation.
That's who the SEC is designed to protect.
(17:58):
And in that case, they're designed to protectit through forcing transparency and accuracy in
the reports that that company makes.
They are to maintain fair, orderly, andefficient markets and facilitate capital
formation.
So if you don't like capitalism, these are theguys you also don't like, the SEC.
But in general, they are not interested in halfof what the Bloomberg article and the game
developer article say, and that doesn't meanthat they don't care about children being safe
(18:22):
or pedophilia or anything else.
Every good hearted person wants to keep thechildren safe and out of harm's way.
But the SEC, like any other federal agency,only has the authority given to it by Congress.
And in this case, the SEC is only investigatingthings related to investor protection,
transparency, and maintaining fair, orderly,and efficient markets.
If you're interested in children's safety, youmight ask someone like the FTC.
(18:45):
We've seen them discussed in virtual legalitybefore.
Here's a copy of the children's online privacyprotection rule as promulgated by the FTC.
This is what protects children's data or issupposed to protect children's data and FTC
actions in lawsuit land or otherwise seek toenforce this rule to protect children's data.
Otherwise, you might be interested if you'reinterested in the exploitation side of things
(19:07):
in checking whether the Department of Labor hasan issue here.
The Department of Labor at the federal level isthe one responsible for enforcing wage and hour
laws, making sure employees are getting paidcorrectly.
If you think something is wrong with the wayRoblox is operating its dev system as we saw in
various YouTube videos a couple years ago and Ithink even continuing now, this is where you
(19:29):
might look to see if a complaint was filed orif you really want to heighten things, you go
and you talk to the Department of Justice.
Right?
The Department of Justice enforces the criminallaws, enforces those laws that protect kids.
Here we have a website that is tips onprotecting kids at home and online.
And the Department of Justice, if they had aninvestigation or they were otherwise interested
(19:49):
in Roblox, might be someone that you asked onthis particular question.
So in answer to whether Roblox is in trouble ornot, if we look at their stock price, it hasn't
really fluctuated based on any of this news.
It did fluctuate a little bit on their earningsreport, which came in a little softer than they
had indicated that was likely, in this mostrecent reporting quarter.
But overall, I think this article about the SECinvestigation sounds like a lot, and it's
(20:14):
certainly being reported on as a lot withrespect to bringing in all the children's
safety complaints and possible issues thatRoblox might have with that in the future.
But the fact that there's an SEC investigationdoes not, to my mind, mean that any of that is
happening behind the scenes at a federalinvestigatory level right this second.
It would surprise me a lot if the SEC wereinvestigating any of those public safety
(20:38):
concerns except in respect of whether or notRoblox is properly reporting on what their
liabilities might be with respect to thosechildren's safety concerns.
So the SEC is confirming they're in an activeand an ongoing investigation.
We've talked about the fact that that benefitsthem from not complying with FOIA requests.
So they might still be in an active ongoinginvestigation.
(20:58):
It might be an investigation that is on itslast legs.
We don't know what it was about becauseBloomberg can't confirm, which is a little bit
of a surprise because Bloomberg Newsundoubtedly has sources with access to the SEC
and other federal agencies.
But overall, if you love Roblox, I don't thinkthis is the end state right now, but it is a
story you are definitely wanna gonna wanna keeptrack of in the immediate future.
(21:21):
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giving up votes, down votes, comments, orotherwise interacting with YouTube and telling
folks like your friends that we're havingconversations like this in this space.
Thank you so much for being here in VirtualLegality.
Please do leave any other questions or commentsto this video.
(21:41):
I try to respond to as many as I can, and Iwill see you on the next episode of Virtual
Legality.
Virtual Legality is a YouTube video series withaudio podcast versions presented as commentary
and for education and entertainment purposesonly.
It does not constitute legal advice and doesnot create an attorney client relationship.
(22:03):
If you have legal questions about the topicsdiscussed, please consult your own legal
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