In addition to the rules and regulations governing the numerous mandatory disclosure obligations under the federal securities laws, the SEC also has several rules governing a company’s obligations vis-a-vis voluntary disclosures. I have written several times about the use of non-GAAP financial measures (see HERE and the imbedded links therein), but it has been several years (10!) since I wrote about the rules and regulations that form a part of Regulation Fair Disclosure (“Regulation FD”).
Regulation FD, comprised of Exchange Act Rules 100-103, was first adopted in the year 2000 in response to concerns about selective disclosure to certain market participants, including a practice of having private calls with analysts, institutional shareholders and traders. Regulation FD requires a company to make public disclosure in advance of an intentional disclosure of material non-public information or immediately following an inadvertent disclosure of such material information.
Regulation FD Rules
Exchange Act Rule 100 mandates that whenever a company or any person acting on its behalf, discloses any material nonpublic information regarding that company or its securities to a “covered person,” public disclosure must be made: (i) simultaneously, in the case of an intentional disclosure; and (ii) promptly, in the case of a non-intentional disclosure. In practice, a Regulation FD disclosure is usually made in a Form 8-K immediately prior to disclosing the information to a more limited audience.
A covered person includes any person that is outside the company and who is: (i) a broker or dealer, or a person associated with a broker or dealer; (ii) an investment advisor or institutional investment manager or person associated therewith; (iii) an investment company or person affiliated therewith; (iv) a shareholder under circumstances in which it is reasonably foreseeable that the person will trade based on the information.
Regulation FD does not require public disclosure where information is disclosed to: (i) a person who owes a duty of trust or confidence to the company (such as an attorney, investment banker, or accountant); or (ii) in connection with a registered securities offering under the Securities Act. In addition, several communications are exempt from Regulation FD including: (i) ordinary course of business disclosures to clients, suppliers and customers; (ii) disclosures made by foreign private issuers; and (iii) discussions with persons who expressly agree to maintain the information in confidence (such as by signing an NDA). Discussions with rating agencies are not exempt.
Exchange Act Rule 101 contains the applicable definitions. A “person acting on behalf of an issuer” is defined as any senior official of the issuer, or any other officer, employee, or agent of an issuer who regularly communicates with any covered person. Regulation FD also extends to any employee directed to make a selective disclosure by a member of senior management. The definition specifically excludes a person that makes disclosure in breach of a duty of trust or confidence. SEC C&DI confirms that a person that is not authorized to speak to a covered person but does so anyway would be breaching a duty of trust or confidence such that the company would not be liable for a violation of Regulation FD.
Where the disclosure is inadvertent, the requirement to make public disclosure “promptly” is defined as soon as reasonably practicable (but in no event after the later of 24 hours or the commencement of the next day’s trading on the New York Stock Exchange) after learning of the inadvertent disclosure.
Public disclosure must be made by filing or furnishing a Form 8-K, provided however, that a Form 8-K is not required if public disclosure is made by disseminating the information through another method (or combination of methods) that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. Generally, disclosure is made with an Item 7.01 or 8.01 Form 8-K.
Violations of Regulation FD do not create a private cause of action and do not, on their own, implicate the anti-fraud provisions of the securities laws. Rather, the liability is largely monetary as a result of SEC fines and penalties and reputational impact.
Finally, as the information may be furnished (and not filed), the failure to make a Regulation FD disclosure will not affect S-3 eligibility or a determination of current public information under Rule 144.
Nasdaq
In addition to the Exchange Act rules, several Nasdaq rules specifically reference Regulation FD. In particular:
- A Company that receives a written determination denying its application for listing must, within four business days, make a public announcement in a press release or other Regulation FD compliant manner about the receipt of the determination and the Rule(s) upon which the determination is based, describing each specific basis and concern identified by Nasdaq in reaching its determination. If the public announcement is not made by the Company within the time allotted or does not include all of the required information, Nasdaq will make a public announcement with the required information.
- Except in unusual circumstances, a Nasdaq-listed Company shall make prompt disclosure to the public through any Regulation FD compliant method (or combination of methods) of disclosure of any material information that would reasonably be expected to affect the value of its securities or influence investors’ decisions. The Company shall, prior to the release of the information, provide notice of such disclosure to Nasdaq’s MarketWatch Department at least ten minutes prior to public announcement.
- In the case of any dividend action or action relating to a stock distribution of a listed stock the Company shall, no later than 10 calendar days prior to the record date of such action… (ii) provide public notice using a Regulation FD compliant method.
Guidance and Practice Tips
Compliance and Disclosure Interpretations (C&DI)
The SEC has issued 18 C&DI on Regulation FD. The first C&DI, which is the most interesting (see historical practices below), directly addresses whether a company may ever selectively confirm a prior earnings forecast. In answering in the affirmative, the SEC notes that a company must consider whether the confirmation conveys any information above and beyond the original forecast and whether that additional information is itself material. Among many factors to consider is timing. For example, if a company confirms guidance issued at the beginning of a quarter, at the end of the quarter, the markets will likely see this as an indication of actual results and thus material new information. Intervening information is also important. If a company confirms guidance after announcing a major supplier has gone out of business, it would be material new information.
Most important is whether the company communicates non-public material information. A separate C&DI discusses circumstances in which a company may privately review and comment on an analyst’s model. A company may do so if it does not communicate new non-public material information. For example, the correction of mistaken historical data or immaterial facts would not be problematic.
The C&DI also confirm that Regulation FD does not create a duty to update information. The C&DI also confirms that material non-public information may be provided to a covered person if such person expressly agrees to maintain the confidentiality of the information until it is made public.
Regarding registered offerings, the C&DI confirm that a re-sale registration does not count, such that information provided in the private placement prior to the filing of the re-sale registration would be subject to Regulation FD.
Materiality
Regulation FD only applies to material information. The 1976 U.S. Supreme court case of TSC Industries, Inc. v. Northway, Inc. held that information should be deemed material if there exists a substantial likelihood that it would have been viewed by the reasonable investor as having significantly altered the total mix of information available to the public and that remains the standard today. However, of course, materiality is extremely fact and circumstances driven.
Regarding Regulation FD, in its adopting release, the SEC pointed out seven non-exclusive topics that would most likely be “material” including: (i) earnings information; (ii) mergers, acquisitions, tender offers, joint ventures, or changes in assets; (iii) new products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract); (iv) changes in control or in management; (v) change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report; (vi) events regarding the issuer’s securities – e.g., defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, public or private sales of additional securities; and (vii) bankruptcies or receiverships.
In the following discussion, the SEC emphasized earning releases and information as being of special concern in the context of selective disclosure. I note that the vast majority of Regulation FD enforcement actions have involved earnings information.
Social Media and Websites
In April 2013, the SEC confirmed that Regulation FD applies to social media in the same manner that it applies to company websites. The SEC has previously issued guidance stating that company websites are an effective means of delivering information in compliance with Regulation FD, as long as the investing public has been informed that they are to look to the company website for such information.
The April guidance confirmed 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. The report was issued following an investigation into a Facebook posting made by Reed Hastings, CEO of Netflix. My three-part blog on the SEC guidance can be found HERE; HERE; and HERE.
As far back as in 2008, the SEC issued guidance and confirmed that websites are an effective means of delivering information in compliance with Regulation FD, as long as the investing public has been informed that they are to look to the company website for such information. The SEC treats websites and social media the same for purposes of Regulation FD.
According to the SEC, “[I]n order to make information public, it must be disseminated in a manner calculated to reach the securities marketplace in general through recognized channels of distribution and public investors must be afforded a reasonable waiting period to react to the information.” Therefore, in determining whether information is public, the first question is whether the website or social media platform is a recognized channel of distribution. The answer to that question depends on the efforts the company has taken to alert the marketplace to its website and a particular social media platform as a source for the distribution of information, and whether the public and marketplace actually look to these sources. In other words, a company can launch a campaign informing the world that it will post weekly sales updates on its Twitter page; however, if in fact only a small handful of people view that Twitter page, the information is likely not public.
In determining whether information is public, the second question is whether information posted on a website or social media platform is disseminated to the marketplace. Generally, in today’s world, all information posted on a website in an unrestricted manner or social media platform would be disseminated information. Notably, when the SEC sued Elon Musk in 2018 for a tweet in which he stated that he was considering taking Tesla private, the complaint included numerous fraud violations, but did not include a claim for a violation of Regulation FD. Presumably the SEC believed that the use of Mr. Musk’s Twitter feed to disseminate material nonpublic information about Tesla complied with the SEC’s guidance regarding the application of Regulation FD to social and other non-traditional media.
However, even websites can provide traps for the unwary. In a notable case, the SEC sued Sun Microsystems for Regulation FD violations. Sun Microsystems had a practice of posting prominent news in the feed across the top of its website and when it “buried” material news, the SEC pounced. This is a perfect example of paying attention to historical practices discussed immediately below.
Pay Attention to Historical Practices
A company’s historical practices related to the issuance of information using social media are not the only historical practices that can implicate Regulation FD. In 2002 a company that had historically reduced its earning guidance on a regular basis, and had done so several times that year, confirmed, in a private meeting with an analyst, that previously issued guidance was still on track. The analyst published the confirmation as news and the company’s stock traded up both on price and volume. In bringing an action for a violation of Regulation FD, the SEC concluded that in light of the trend of lowering its earnings guidance, a confirmation that there was no change in previously issued guidance, was material non-public information that needed to be disclosed to the public in accordance with Regulation FD. See also, discussion on issued C&DI above.
Anything Can Be a Communication
Also in 2002, the SEC obtained one of its largest penalties for a violation of Regulation FD. In the case involving Schering-Plough Corporation, the SEC found the CEO violated Regulation FD for both verbal and nonverbal selective disclosure of material nonpublic earnings information. Schering-Plough is the manufacturer of Claritin. In 2002 the company was losing its patent on Claritin and in a series of private meetings with analysis and four institutional shareholders, the CEO was “downbeat” and that his tone, emphasis and demeanor were negative such as to signal to the attendees that the company had a problem. Immediately following the meeting, the attendees began dumping shares. The SEC sued, warning that “[i]ssuers may not evade the public disclosure requirements of Regulation FD by using ‘code’ words or ‘winks and nods’ to convey material nonpublic information during private conversations.”
On the other hand, the SEC lost a case based on non-verbal tone and demeanor where a CEO provided public communication in a somewhat positive tone and the CFO later provided the same information privately in a negative tone. The court found that the difference rested with the human communication skills and personalities of the two individuals as opposed to a hidden message or differing information.
Conferences
Conferences provide an easy trap for Regulation FD violations. I advise all my clients to file an 8-K with any conference presentation materials prior to the conference presentation and to be mindful of disclosing material non-public information, especially during a Q&A session that can provide an easy ground for the slippage of information.
Policies and Procedures
It is not enough to have policies and procedures in place to prevent a violation of Regulation FD, but executives and investor relations personnel must be trained on and understand those procedures. In what resulted in one of the largest Regulation FD settlements to date ($6.25 million), in 2002, the SEC sued AT&T for a flagrant violation of Regulation FD. Of interest in the case is that the staff responsible for the violation apparently really believed that their actions did not violate the law. Targeted training for those executives and employees that communicate with analysts and industry professionals is key.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC 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, Regulation A/A+ offerings, as well as registration statements on Forms S-1, F-1, S-3, F-3, S-8 and merger registrations on Form S-4 and F-4; compliance with 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; 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 American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA 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 small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including American Red Cross for Palm Beach and Martin Counties, the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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