There is a lot of debate surrounding the legality of short seller reports. Some people believe that they are legal, while others believe that they are not. So, are short seller reports legal? There is no definitive answer to this question, as the legality of short seller reports will vary from country to country. 

In this article, we will take a look at what short seller reports are, how they work, and whether or not they are legal. We will also discuss the consequences of releasing a short report. 

What is a short seller report? 

A short report is a research report that is published by a firm or individual investor who is bearish on a particular stock. The purpose of a short report is to persuade other investors to sell their shares in the company so that the person publishing the report can make a profit. 

It also aims at creating awareness of the problems the company is facing. In some cases, short seller reports reveal accounting fraud and other illegal practices that companies may engage in to defraud investors. This is usually associated with trying to portray an image of the company that is far from reality and to prop up either their financials or other operating metrics to make their stock a more enticing investment.

How short seller reports work 

The person or firm who writes a short report aims to show investors specific problems related to a certain publicly-traded company. Most of the time the firms or individuals engaged in short selling reports will first short the stock, or buy put options before releasing the report.

They will then release a short seller report, which will contain negative information about the company in an attempt to convince other investors to sell their shares. 

If enough people sell their shares, the price of the stock will go down and the person who wrote the report will be able to buy the shares back at a lower price, returning them to the original owner and making a profit in the process. 

Are short-seller reports legal? 

Yes, they are legal because they are opinionated pieces that are based on research. However, the SEC may bring legal action against short-sellers for releasing false or misleading information. 

The legality of short seller reports has been called into question in recent years, especially in cases where firms or individual investors are short the stock, and benefit from releasing the report. 

Some people argue that they are nothing more than manipulation of the markets and should be banned. Others say that they provide valuable information to investors and should be allowed to continue. 

The SEC has not yet taken a definitive stance on this issue, but it is something that may be addressed in the future. For now, short-seller reports remain legal but their future is uncertain. 

How is a short seller report legal? 

As long as the information in the report is accurate and based on research, a short report is legal. But if the information in the report is false or misleading, it may be deemed illegal.

A legal short report would look something like this: 

"This company looks like it's in trouble. The stock seems to be overvalued and will likely drop soon based on general observation. The consumer demand for this type of product is waning after researching market trends. The company's financials do not look very strong. In my personal opinion, I believe that this stock is a sell." 

On the other hand, an illegal short report would look something like this: 

"This company is about to go bankrupt. Their stock will drop to zero within the next month. I know the management team is already selling their shares. Their suppliers have stopped working with them. This company is facing product recalls. Sell now before it's too late!" 

Both of these reports are opinionated, but only one of them is based on false or misleading information. For example, if it's not true that the company is about to go bankrupt, then the second report would be illegal. 

Product recalls and supplier issues may also be illegal to write about if this information is not true. This misinformation and rumor spreading is the reason why some investors have a negative opinion of short-seller reports. 

It causes capital to flow away from great companies just so that they can make a quick profit. 

On the other hand, an ethical short seller's report like the first example can help investors see the other side of the coin and make better investment decisions. 

This leads to a decline in biased thinking and FOMO investing which can protect some investors. It's important to remember that not all short-seller reports are legal. Always do your own research before making any investment decisions. 

Consequences of a short seller report 

The first consequence of a short report is that it can negatively impact the company's stock price. This is because investors may sell their shares of the company after reading the report, causing the stock price to drop. 

Additionally, the company may be subject to increased scrutiny from regulators or law enforcement officials after a short report is published. 

Finally, the company may have difficulty raising capital in the future if investors are concerned about its financial health. This can cause a company to go bankrupt and shows how short-selling can hurt a company

Short sellers should be aware of these potential consequences before publishing any reports. While there is no guarantee that a short report will result in negative consequences for a company, it is important to weigh all risks and benefits before taking any action. 

GameStop example

Short selling can be a profitable strategy, but it should not be undertaken lightly. This is because short reports can also have negative consequences for the firm or person that wrote the report. For example, after a short report was released about GameStop, Redditors fought back by buying up shares to drive up the stock price. 

This forced the short sellers to cover their positions. Eventually, the GameStop short-sellers ended up losing nearly $7 billion. The consequences of short reports are not just potential legal ones. If enough investors act in the opposite way that short-sellers hope, it could also bankrupt the short-seller. 

While there are no concrete laws against short selling, there are certain regulations in place. For example, the U.S. Securities and Exchange Commission (SEC) requires that short-sellers must have a reasonable belief that a stock’s price will drop before they sell it. 

If a short-seller were to share misinformation intentionally, the legal consequences could be much more severe. 


Determining what is opinionated and what is untrue facts, can still be a challenging task. For this reason, if you’re thinking about taking action after reading a short report, make sure to DYOR (do your own research). 

A short-seller report may have malicious intentions. And if you are thinking about writing a short-sellers report, remember to stay on the right side of the law.