On April 2, 2013, in response to a Facebook post made by Reed Hastings, CEO of Netflix, the Securities Exchange Commission (“SEC”) issued a report confirming that companies can use social media, such as Facebook and Twitter, to make company announcements in compliance with Regulation Fair Disclosure (Regulation FD) as long as investors are alerted as to which social media outlet is being used by the company. In the report the SEC stated that previously published guidance on the use of Company websites was applicable to the use of social media. Accordingly, in a series of blogs I am reviewing the SEC guidance on the use of company websites. This blog is Part III in the series.
Background
Regulation FD requires that companies take steps to ensure that material information is disclosed to the general public in a fair and fully accessible manner such that the public as a whole has simultaneous access to the information. Regulation ended the era of invitation-only conference calls between company management and a select group of brokers and investment bankers, in which plans and earnings would be discussed and material information shared in advance of such information becoming public knowledge. In its report issued on April 2, 2013, the SEC confirmed that Regulation FD applies to social media in the same manner it applies to company websites.
SEC Guidance on the Use of Company Websites
The SEC issued its Commission Guidance on the Use of Company Websites, effective August 7, 2008, which guidance remains applicable today. A complete copy of the guidance is available on the SEC website and is summarized in this series of blogs, with this being Part III in the series. In general the SEC encourages the use of company websites, and technology generally, to provide information to investors, provide analytical tools, and as a source of overall market transparency. The guidance focuses on:
(1) When information posted on a company website is “public” for purposes of the applicability of Regulation FD;
(2) Company liability for information on websites, including previously posted information; hyperlinks to third-party information; summary information and the content of interactive websites;
(3) The types of controls and procedures advisable with respect to website information; and
(4) The format of information presented with a focus on readability, not printability.
Company Liability for Information on Websites, Including Previously Posted Information; Hyperlinks to Third-Party Information; Summary Information and the Content of Interactive Websites
The antifraud provisions of the securities laws apply to statements on a company website, including hyperlinks, or postings on a social media platform in the same manner as they apply to any other statement made by or on behalf of a company. As a quick refresher, Rule 10b-5 makes it unlawful to “make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.” The SEC’s position is that companies are “responsible for the accuracy of their statements that reasonably can be expected to reach investors or the securities markets regardless of the medium through which the statements are made, including the internet. “In order for a statement or information to create liability, it must be material. Materiality is a question of fact and circumstances.
Effect of Accessing Previously Posted Materials
Information, once posted on the internet, remains available through technology thereafter. The concern for companies is if previously posted stale or no longer accurate information that is accessed at a later date is considered re-published by the company, thus creating liability. The SEC’s position is that historical information, even if maintained on a company website, is not considered re-published as current information for purposes of creating liability. Of course, if a company affirmatively restates or reissues information, it is considered current information once again.
To ensure that a person accessing information is informed as to the date of such information, postings should:
- clearly identify previously posted or historical information, including by dating such information; and
- place historical information in a separate section of the website.
Hyperlinks to Third-Party Information
Under Section 10(b) (5) of the Exchange Act, a company can be held liable for third-party information to which it hyperlinks from its website and which could be attributable to the company. Whether the third-party information could be attributable to the company depends on whether the company has: (i) involved itself in the preparation of the information (entanglement theory); or (ii) explicitly or implicitly endorsed or approved the information (adoption theory).According to the SEC, the following nonexclusive list of factors should be considered:
- Context of the hyperlink – what the company says about the link or what is implied by the context in which it is used;
- Risk of confusing investors – the presence or absence of precautions against investor confusion about the source of information;
- Presentation of hyperlinked information – how the hyperlink is presented graphically on the site, including the layout of the screen; and
- Content of the information linked – is the content very specific or general in nature; positive or negative information related to the company.
The SEC, and this firm, advocate being clear as to the purpose of a hyperlink, and being explicit as to what if any portions of the hyperlinked information are endorsed by the company. For example, a page of useful links (such as is in the SEC website, this firm’s website, etc.) should contain an explanation and disclaimer that information on the third-party websites is independent and not endorsed (although if the hyperlinked information is false and misleading positive information about a company, no disclaimer will protect from anti-fraud liability).If the link is related to a specific article or cross-reference, then it should be clear as to what portion of the information is being cross-referenced or endorsed.
Summary Information
The SEC has specifically provided guidance on the use of summaries or overviews of information on a company website. Unlike when contained in a registration statement or report filed with the SEC, summary information on a website stands alone and, without context, has the potential to be misleading. Accordingly, to avoid confusion, where appropriate, a company should include information as to the location of the detailed disclosure from which the summary is derived and should use explanatory notes and disclosures. The SEC suggests the following techniques when using summary information:
- Use of appropriate titles – use appropriate titles and headings;
- Use of additional explanatory language – use explanatory language to identity the text as a summary and the location of more detailed information;
- Use and placement of hyperlinks – place hyperlinks to the more detailed information either within or in close proximity to the summary; and
- Use of layered or tiered format – place most important information up front with embedded or tiered-down links to the more detailed information.
Interactive Website Features
Interactive website features are now the norm, whether it is a blog or shareholder forum, or customer service representatives ready to chat online. Since all information has the potential to be attributed to or endorsed by the company, steps should be taken to prevent unintended results. In addition to the various methods discussed above for hyperlinks and summary information, a company should be sure that employees and management are monitored and educated on their postings and information provided in an interactive forum.
Moreover, as a point of clarity the SEC reminds companies that the antifraud provisions of the federal securities laws apply to blogs and to electronic shareholder forums. Regardless of the informal nature of a blog or shareholder forum, statements made by or on behalf of a company will not be treated differently from other company statements. Moreover, statements made by a company employee or representative will always be deemed to be made by or on behalf of the company. In addition, a company cannot request or require that investors waive any rights or protections as a condition to entering into or participating in a blog or forum. Likewise, a company is not responsible for the statements that third parties post on a blog or forum, nor is a company obligated to respond to or correct erroneous statements made by such third parties.
Format of Information and Readability
The SEC recognizes the nature of websites and different website formatting. It therefore does not require that information be formatted to provide printer-friendly versions (unless a specific rule explicitly makes such a requirement).
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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