With today’s one year anniversary of the SEC’s social media guidance added to RegFD, it seems a good a time as any to refresh the details of RegFD.
Issuers have considerable flexibility in determining how to satisfy the public disclosure requirements of RegFD. The public disclosure requirement can be satisfied by filing the information in a Form 8-K or by any other non-exclusionary method of disclosure that is reasonably designed to provide broad public access to the information.
RegFD was implemented October 2000 to address perceived abuses involving the selective disclosure of material nonpublic information to analysts, institutional shareholders and others with the opportunity to profit from such information. Prior to the adoption of RegFD, a number of public companies were disclosing earnings results and other nonpublic information to analysts and institutional investors before broadly disseminating that information to the general public. The SEC believed this informational disparity undermined the investing public’s confidence in the fairness and integrity of securities markets, since those who were privy to such information had the opportunity to profit at the expense of the uninformed.
At the time RegFD was adopted, the SEC recognized the potential for using website disclosure as an acceptable means of satisfying the “public disclosure” requirement of RegFD, but stopped short of concluding that such disclosure would, by itself, suffice.
In August 2008, the SEC issued an Interpretative Release – Commission Guidance on the Use of Company Websites – in which it concluded that certain issuers could, subject to certain conditions, satisfy the public disclosure requirement under RegFD by posting information to their websites. To take advantage of this means of satisfying the disclosure requirement, an issuer must that its website is a recognized channel of distribution and that the disclosed information is posted and accessible on the website and has been “disseminated” for purposes of the regulation.
In this regard, the release noted that whether a company’s website is a “recognized channel of distribution” will depend on the steps the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website. Similarly, one of the factors to be considered in determining whether information on the website has been “disseminated” for purposes of RegFD is whether the company has made investors and the markets aware that it will post information on its website. While the release did not provide “bright-line” guidance as to when the public disclosure requirements of RegFD could be satisfied by an issuer’s website posting, it did provide a non-exclusive list of considerations that an issuer could use to make such a determination.
Questions regarding the legality and propriety of public disclosure through websites resurfaced when Netflix and its CEO, Reed Hastings, received Wells notices from the SEC staff communicating the staff’s intent to recommend an enforcement action against them for violation of RegFD. The staff’s action was in response to a July 2012 post on Mr. Hastings’ Facebook page, stating that in June 2012 monthly viewing of Netflix had exceeded a billion hours for the first time ever. Within two trading days of Mr. Hastings’ post, Netflix’s stock price had risen by nearly 20%, although it is not clear whether this rise was due to the Facebook post or other factors. The SEC ultimately determined not to bring an enforcement action against Netflix or Mr. Hastings. However, it released a 21A report of investigation to provide guidance to issuers regarding how RegFD and the earlier guidance in its 2008 Interpretive Release on the use of company websites apply to disclosures made through social media channels.
The April 3, 2013 report noted that in light of the direct and immediate communication made possible by social media channels, the SEC expected issuers to rigorously examine whether a particular channel is a “recognized channel of distribution” prior to disclosing any material information through it. To this end, the SEC emphasized that, as outlined in its 2008 Interpretive Release, the investing public should be alerted to the channels of distribution a company will use to disseminate material nonpublic information. The SEC suggested that a company could provide appropriate notice to the investing public by disclosing on its website the specific social media channels the company intends to use for the dissemination of material nonpublic information. The SEC cautioned that the disclosure of material nonpublic information on the personal social media site of an individual corporate officer – without advance notice to investors that the site could be used for such purpose – would likely be a violation of RegFD.
What is Material Information? RegFD only prohibits the selective disclosure of material information. RegFD does not define materiality, but instead relies on the definition that has developed through case law. Based on the general principles established by the courts, information would be considered material if:
- There is a substantial likelihood that a reasonable investor would consider it important in making an investment decision
- It would be viewed by a reasonable investor as significantly altering the total mix of information available
- It is reasonably certain to have a substantial effect on the market price of the issuer’s securities
Given the fact-dependent nature of the analysis, there is no bright-line rule as to what should be considered material for purposes of RegFD. In the adopting release for RegFD, however, the SEC provided a non-exclusive list of the types of information and events that issuers should carefully review to assess materiality:
- Earnings information
- Mergers, acquisitions, tender offers, joint ventures or changes in assets
- New products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract)
- Changes in control or in management
- Change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report
- 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
- Bankruptcies or receiverships
The SEC has made clear that any communication between an issuer and analysts regarding earnings involves a high degree of risk under RegFD. As a result, any information that an issuer plans to disclose to an analyst should be carefully scrutinized to confirm that it is not material or has already been publicly disseminated. If those determinations cannot be made with certainty, the issuer should consider the information material and comply with the public disclosure requirements of RegFD.