On April 21, 2014, the SEC updated its Division of Corporation Finance Compliance and Disclosure Interpretations (C&DI) to provide guidance as to the use of Twitter and other social media communications in conjunction with a public offering or business combination transaction.
Background
Previously, 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.
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 FD 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. In a series of blogs entitled SEC Guidance on Social Media and Websites for Company Announcements and Communications published here , and 4/25/2013, 5/3/2013, and 5/14/2013 I discussed this guidance.
Moreover, federal securities laws place significant restrictions on the types of publicity and communications that a Company may issue while it is “in registration” in connection with a public offering. The purpose of these regulations is to ensure that communications are fair and balanced and not intended to condition the market for the offering. Failure to comply with these restrictions could delay or prevent the public offering and result in civil and criminal penalties. According to the SEC, “in registration” refers to the entire process from the time an issuer reaches an understanding with its managing underwriter or an internal decision to file a registration statement, through the period of effectiveness. In addition to the anti-fraud provisions, the SEC requires that certain notices (a “legend”) be placed on written communications.
Similarly, the federal securities laws place significant restrictions on the types of publicity and communications that a Company may issue in conjunction with the solicitation of shareholder consent and proxies associated with a business combination transaction (i.e., a merger).
New Guidance on Use of Social Media for Communications Related to or During an Offering
The SEC has many rules and regulations related to communications surrounding an offering period. Rule 134 addresses communications made after the filing of a registration statement by an Issuer regarding the issuer, the offer, and procedural matters related to the offering. Except where the communication is a simple tombstone ad containing no more than the contact information and a URL link to the filed registration statement, and identifying the type of security and price range and underwriter, Rule 134 requires that certain legends appear on all such communications. For instance, Rule 134(b) requires the following legend on all communications after the filing of a registration statement and prior to its effectiveness:
“A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.”
Rule 134(d) requires that a communication that is accompanied or preceded by the prospectus must contain the following legend:
“No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.”
Clearly, some electronic communication platforms, such as those made available through certain social media websites, limit the number of characters or amount of text that can be included in the communication, effectively precluding display of the required statements together with the other information. The April 21, 2014, SEC C&DI update answers the question “[U]nder what circumstances would the use of a hyperlink to the required statements satisfy the Rule 134(b) or Rule 134(d) requirements?”
The SEC provides the following answer:
“Answer: Recognizing the growing interest in using technologies such as social media to communicate with security holders and potential investors, the staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 134(b) or Rule 134(d) in the following limited circumstances:
- The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
- Including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
- The communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.
Where an electronic communication is capable of including the required statements, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required statements would be inappropriate.” [April 21, 2014]
Moreover, the SEC provided guidance on a Company’s responsibilities for a third party’s re-transmission or re-posting of a Company’s communication. That is, the SEC addresses a Company’s responsibility where a third party retweets or shares a company communication. In particular, the SEC C&DI provides:
“Answer: If the third party is neither an offering participant nor acting on behalf of the issuer or an offering participant and the issuer has no involvement in the third party’s re-transmission beyond having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433, the re-transmission would not be attributable to the issuer. As explained in Securities Act Release No. 33-8591 (July 19, 2005), “[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.” [April 21, 2014]
Note that Securities Act Release No. 33-8591 (July 19, 2005) is the Securities Offering Reform Act of 2005, which included the initial enactment of Rule 134. A complete discussion of the Securities Reform Act is beyond the scope of this blog; however, the Act loosened up pre- and post-filing offer and communication rules dramatically.
In addition, Rule 433 contains requirements for communications (“free writing prospectus”) made after the effectiveness of a registration statement which information is not contained in such registration statement. The SEC repeats its guidance related to direct company communications and third-party reposts of such communications, verbatim, in relation to Rule 433.
New Guidance on Use of Social Media for Communications in Connection With a Business Combination Transaction
Similar to the rules related to communications during an offering process, the SEC has rules related to communications both before and after the filing of a registration statement in conjunction with a business combination (merger) transaction and communications made for the purpose of soliciting votes in favor of or against a proposed transaction. Rule 165 governs such communications. Rule 165 communications requires a legend, similar to Rule 134, on Company communications.
Again, some electronic communication platforms, such as those made available through certain social media websites, limit the number of characters or amount of text that can be included in the communication, effectively precluding display of the required statements together with the other information. The April 21, 2014, SEC C&DI update answers the question “[U]nder what circumstances would the use of a hyperlink to the legend satisfy the Rule 165(c)(1) requirement?”
The SEC guidance mirrors the guidance related to Rule 134 communications. The SEC states:
“Answer: Recognizing the growing interest in using technologies such as social media to communicate with security holders, the staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 165(c)(1) in the following limited circumstances:
- The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
- Including the legend in its entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
- The communication contains an active hyperlink to the required legend and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.
Where an electronic communication is capable of including the required legend, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required legend would be inappropriate. This position also applies to written communications that constitute solicitations made in reliance on Exchange Act Rule 14a-12 and pre-commencement written communications subject to Exchange Act Rules 13e-4(c), 14d-2(b) and 14d-9(a).” [April 21, 2014]
Conclusion
Although this guidance is helpful, it is also problematic. In particular, the SEC requires “[T]he communication contains an active hyperlink to the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.” The obvious issue is: how can a Company satisfy this requirement and include any other information of relevance in 140 characters or fewer? Also not addressed is whether a Company can post a series of communications, which are obviously related both in topic and time (such as a delay of no more than a few minutes between each post), and only include the required hyperlink and statement in one of such posts.
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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