In late 2020 and early 2021, an event unfolded that spotlighted the complexities of modern financial markets for the world to witness.
A struggling brick-and-mortar video game retailer, GameStop, found itself at the centre of an unprecedented stock market phenomenon, becoming a modern-day symbol of a David versus Goliath battle.
While it was a financial saga at its core, the entire episode had far-reaching legal implications.
How did it happen? And how can businesses confidently navigate the intricate legal labyrinth governing their operations?
Understanding the GameStop phenomenon
GameStop’s business model had been under stress for years, given the rise of online gaming and digital downloads.
This struggle was further exacerbated by the COVID-19 pandemic, which forced many physical retailers to close their doors.
As a result, many institutional investors and hedge funds had taken a short position on GameStop, effectively betting that the company’s stock price would continue to fall.
The Reddit rally
However, members of a Reddit forum called r/WallStreetBets noticed that the short interest in GameStop was unusually high.
In what seemed like a coordinated effort, thousands of these individual investors began buying GameStop stock and options, causing the price to rise significantly.
As the stock’s price went up, the hedge funds that had shorted the stock were forced to buy more shares to cover their positions, causing what’s known as a “short squeeze.”
This further drove up the price of the stock. In January 2021, GameStop’s stock price peaked at $483, an unimaginable rise from its price of around $20 at the beginning of the month.
The aftermath
Many individual investors profited on GameStop shares, but others who bought in at the peak faced significant losses when the price inevitably fell.
The aftermath led to significant market volatility, which raised many questions about market manipulation, the role of social media in the stock market, and the responsibilities of brokerage platforms.
The event demonstrated the power of collective retail investing and the impact of modern, commission-free trading platforms like Robinhood. However, it also demonstrated the potential risks and volatility associated with such activities.
Lesson learned? Navigating the legal labyrinth
The GameStop incident underscores the importance of understanding a business’s legal and regulatory aspects, even for individual investors.
It shows that legal complexities can arise from unexpected quarters in today’s interconnected world and the importance of legal tech solutions for individuals and businesses.
While your business might not be amid a Reddit-induced financial storm, legal obligations permeate all business operations, from incorporation and contracts to intellectual property rights and data protection.
Legal preparedness and agility
Businesses today must stay abreast of all legal changes and requirements that could impact them.
With a legal platform like Zegal, companies can quickly adapt to changing legal landscapes. Whether drafting contracts, managing corporate governance, or ensuring compliance, Zegal ensures you’re prepared to meet any challenge head-on.
Embrace the power of Zegal
GameStop was a stark reminder of the importance of understanding the legal environment in which we operate.
While you might not be facing a band of Reddit day traders, your business is surrounded by a sea of legal requirements.
Zegal’s platform empowers businesses to operate within the legal framework efficiently and confidently. After all, navigating the legal labyrinth should not be a game of chance.
