Recognizing the evolving nature of the internet and that investors now generally have access to the internet, the Securities and Exchange Commission (the “SEC”) recently issued an interpretive release (Release No. 34-58288, the “Release”) to provide additional guidance on a company’s use of its web site and how that use relates to the reporting requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and the antifraud provisions of the federal securities laws. The SEC’s guidance primarily focuses on (i) whether and when information posted on a company’s web site is “public” for purposes of Regulation FD and (ii) federal securities law liability for information posted on or hyperlinked from a company’s web site. The Release also discusses the certification requirements for disclosure controls and procedures with respect to certain web site information and the requisite format of web site information.
I. Regulation FD
Regulation FD is intended to prevent selective disclosure of material nonpublic information to a select group of people to the detriment of the public at large. It provides that when an issuer, or person acting on its behalf, discloses material nonpublic information to one or a small group of specified persons (for example, securities market professionals or securityholders of the issuer who may trade on the basis of that information), it must make public disclosure of that information. The timing of the required public disclosure depends on whether the selective disclosure was intentional or non-intentional; for an intentional selective disclosure, the issuer must make public disclosure simultaneously; for a non-intentional disclosure, the issuer must make public disclosure promptly.
In the Release, the SEC changes its past nonconclusive position and expressly acknowledges that posting timely information to a company’s web site, as the exclusive channel of communication, can be sufficient for some companies to comply with the public disclosure requirements of Regulation FD. While larger, widely followed companies may be able to rely on the Release and begin using their web sites as the exclusive forum for disclosure under Regulation FD, the Release’s guidance provides less comfort to small or mid-sized companies.
To determine if information posted on a company’s web site is “public” information for purposes of Regulation FD, the Release indicates a company needs to consider whether and when (i) its web site is a recognized channel of distribution, (ii) posting to its web site disseminates the information to the marketplace in general, and (iii) it has afforded the market with a reasonable waiting period to react to the information.
The first two elements of this inquiry are interrelated—the first focuses on the degree to which the company has notified investors and the market of its web site as a forum for disclosure, while the second focuses on the design and accessibility of that disclosure. With respect to these first two elements, the Release suggests a number of non-exclusive factors to be considered in determining whether a company’s web site satisfies these elements:
The third element of the test, which focuses on what constitutes a reasonable
waiting period, is a “facts and circumstances” test that considers variables not
dissimilar to the first two elements. The Release indicates that meeting this
element will depend on (i) the size of the company, (ii) the extent to which
investor information is regularly accessed on the site, (iii) the steps the
company has taken to make investors and the market aware of its use of the site
as a disclosure forum, (iv) whether the company has taken steps to actively
disseminate the information, including using other distribution channels, and
(v) the nature and complexity of the information.
II. Applicability of Rule 10b-5
The Release reminds reporting companies that the antifraud provisions of the federal securities laws clearly apply to information posted to or omitted from a company’s web site. Consequently, a company can be liable under Rule 10b-5 for material misstatements or omissions on its web site.
1) Effect of Accessing Previously Posted Materials or Statements
Generally, historical information posted to and maintained on a company’s web site will not be deemed to be constantly “republished” for the purposes of the federal securities laws. This information, so long as the company does not affirmatively restate or reissue it, does not need to be updated for accuracy. The SEC suggests that, if a reasonable person would not readily understand that posted statements or materials are historical and relate to earlier periods of time, companies should:
This could mean that information not ostensibly historical may be deemed to
be republished if it is not located with other historical data. The SEC does not
provide guidance as to how quickly a company must move “historical” statements
from its “current” section to the “archived” one.
2) Hyperlinks to Third-Party Information
The key question with respect to hyperlinks from the company’s site to third-party information is whether one reasonably could infer that the company either has approved or endorsed the hyperlinked information. Under previous SEC guidance, this analysis turns on factors such as what the company says or implies about the hyperlinked information and the context in which the hyperlink is presented. The SEC suggests several actions a company should consider relating to hyperlinks on its web site:
The Release reiterates the SEC’s position that disclaimers alone cannot insulate a company from liability for hyperlinked information that it knows, or “is reckless in not knowing,” to be false or otherwise misleading. Consequently, a company should be judicious in its decision to hyperlink to third-party content.
3) Summary Information
To ensure that summary information is not misleading, the SEC suggests that companies choosing to provide summary information should consider ways to alert users to the location where the user can find more detailed information. The SEC suggests the following techniques to highlight summary information:
4) Interactive Web Site Features (“Blogs”)
Although often conversational and informal in nature, company statements on company-sponsored blogs or electronic shareholder forums will not be treated differently under the federal securities laws from other more formal company statements. Employees acting as representatives of the company must be apprised that their communications will be deemed to be on behalf of the company, even if they purport to speak in their individual capacity. Further, despite the informal nature of these communications, the Release indicates that a company cannot condition a user’s participation in or access to blogs or forums on (i) disclaiming the company’s liability or (ii) an agreement not to use the information on the blog or forum to make an investment decision. A company need not be concerned, however, about content posted by third parties, as to which a company has no duty to respond or make correct.
III. Disclosure Controls and Procedures
SEC rules permit a company to elect to post certain information on its web
site instead of including that information in its Exchange Act reports (for
example, audit, nominating or compensation committee charters may be posted on
the company’s web site instead of being included in the proxy statement). If a
company elects to post this information to its web site instead of including it
in Exchange Act reports, then the certifications regarding the company’s
disclosure controls and procedures will cover that information. However, this
requirement applies only to the information that is permitted or required to be
disclosed on a company’s web site under SEC rules to satisfy Exchange Act
disclosure requirements and not to the general content of the company’s web
site.
IV. Format of Information
Information posted on a company’s web site does not need to be “printer friendly” unless SEC rules specifically require it (for example, when proxy materials are delivered to investors electronically).
* * *
Companies should review their web site practices in view of the Release. While the Release suggests specific ways in which a company may use its web site to comply with Regulation FD, this guidance may be more helpful to larger companies than to smaller companies. Additionally, the Release reminds all public companies of the need to remember the applicability of the anti-fraud provisions of federal securities laws in using their web sites to provide historical and summary information, to provide hyperlinks to third-party web sites, or to sponsor blogs or electronic shareholder forums.
McGuireWoods LLP regularly assists both large and small public companies in connection with disclosure and compliance matters under the federal securities laws, including those arising under Regulation FD and Rule 10b-5 and is actively engaged in monitoring developments in these areas.