By Lawrence G. Nusbaum
The Securities and Exchange Commission (the “SEC”) realized the need to integrate new technologies into its rules and regulations regarding filing of SEC reports and disclosure in order to promote efficient and transparent capital markets. The SEC, to its much deserved credit, has not only recognized the changing landscape, but also adopted releases and amendments to its rules and regulations and published guidance to assist practitioners and public companies in keeping up with the ever evolving and rapidly changing electronic communication technology.
The SEC’s rules and regulations regarding how public companies file required periodic reports and disclose required information to the investing public have been particular areas where the SEC has recognized the need for integration of new technologies to meet the needs of public issuers and the investing public in the 21st century. Advancements in technology have also dramatically altered certain areas of the securities industry, including providing public companies with alternative disclosure methods of disseminating required disclosure to the investing public. As a result questions over less traditional means of public company disclosure have arisen.
One of the basic principles of the federal securities laws, is full and fair disclosure by issuers subject to the reporting requirements of the Securities and Exchange Act of 1934 as amended, (the “1934 Act”), when involving sales of its securities and/or “material” events. For many years after the adoption of the Securities Act of 1933, as amended (the “1933 Act”), and the 1934 Act, SEC rules and regulations regarding public disclosures were easily adhered to by public companies. The standard process for disclosing material events was that the issuer would issue a press release on a major news wire while simultaneously filing a Current Report on Form 8-K (an “8-K”) and either attach the press release as an exhibit to the 8-K or disclose the information within the body of the 8-K.
In 2000, the SEC adopted Regulation FD which generally provides that public companies disseminate material information to the public in a manner such that all investors have equal access to such information at the same time. The SEC, through regulation FD, sought to eliminate selective disclosure, a situation where certain investors received material information about a public issuer before other investors. A public issuer, when a material event occurs, must publicly disclose all such material information in a manner reasonably designated, in a non-exclusive methodology, to provide all investors concurrent access to the material information. Publicly disclosing material information ensures an equal and equitable marketplace for all investors looking to purchase and/or sell securities of an issuer.
In 1993 the SEC mandated the electronic filing of certain required reports and other documents through EDGAR with the adoption of Regulation S-T. In June 2003, the SEC took the electronic filing mandate one step further by requiring Forms 3, 4 and 5 be filed on EDGAR. In Release No. 33-8230 the SEC explained their rationale: “Mandated electronic filing benefits members of the investing public and the financial community by making information contained in Commission [SEC] filings available to them minutes after receipt by the Commission [SEC].” The release also mandated posting of Forms 3, 4 and 5 by public issuers that maintain a corporate website on their website by the end of the business day following the filing with the SEC. The SEC explained in the release that “one objective of the amendments is to encourage availability of this information in a variety of locations, so that it is broadly accessible.”
In January 2009, the SEC continued to update filing standards as different technologies were introduced and /or improved in furtherance of the SEC’s goal to promote efficient and transparent capital markets. The SEC adopted rules requiring public issuers to post their financial statement information to their websites and filed with the SEC in XBRL (eXtensible Business Reporting Language) format in order to improve the usefulness of such information to investors. Instead of treating financial information as a block text, XBRL enables automated processing of business information by computer software. In this format, the information contained in financial statements can be downloaded directly into spreadsheets, searched and analyzed in a variety of ways using commercial off the shelf software, and used within investment models in other software formats.
Effective in August 2008, the SEC released new interpretive guidance for public issuers regarding disclosure on such issuers’ website in accordance with federal securities laws. The release provides guidance as to when posting data or information on a company’s website is ‘public’ for purposes of Regulation FD. As companies began to disclose information on their websites, the SEC apparently determined that an unfair advantage could be given to certain investors if such investors knew where to look for material information posted by a public issuer while other investors are unaware when or if such material information was posted by the public issuer. In the guidance release the SEC focuses on the actions a company takes to inform investors that the company will post material public information on its website, and the manner in which the information is posted in order to determine whether a company’s website posting satisfies Regulation FD. The release explains that “…in evaluating whether information is public… companies must consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities market place in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information.”
According to the SEC’s guidance release, a company’s website will be considered a recognized channel of distribution when the company has made an effort/taken steps to inform the market that it will use its website to disclose public information. For companies whose websites are known to investors as locations of company’s information, dissemination is determined by (1) the manner in which the information is posted on a company’s website and (2) the timely and ready accessibility of such information to investors and the markets. For the first two items, the release lists non-exclusive factors that companies should consider when making a determination whether the website is a recognized channel of distribution and whether the information released on a company’s website is adequately disseminated. The list includes factors such as whether the company adequately markets its website as a location for important information about the company, how does the company regularly disclose information about itself, and whether the investor information disclosed on the website is easy to find and use. If the first two elements are satisfied, the information on the company website will be deemed properly publicly disclosed once investors are given a reasonable waiting period to react to the information.
The 2008 release’s recognition of a company’s website as a possible location for dissemination of material public information led to questions as to how the SEC’s 2008 Guidance applies to disclosures made through social media sites. With the rise of social media sites like Facebook and Twitter, companies increasingly used social media to communicate with shareholders and the market in general.
In 2013, the SEC tackled the issue of disclosure through social media in SEC Release No. 69279. The release addressed the issue of whether the posting of material information on a public company or its executive’s social media page constituted selective disclosure under Regulation FD. The issue was triggered when the CEO of Netflix, Reed Hastings, disclosed on his Facebook page that Netflix’s monthly viewing exceeded one billion hours for the first time in June 2012. The SEC indicated that this information was material to investors as the amount of time viewers spent streaming showed “widespread adoption and usage of the service.” Mr. Hastings had never disclosed company metrics on his Facebook page before, and Netflix had not previously taken steps to inform the investing public that Hasting’s Facebook page would be used to disseminate Netflix company information. At the time, Hastings’ had over 200,000 Facebook followers, including securities professionals. In the release, the SEC explains that issuer communications made through social media channels must be analyzed for compliance in accordance with Regulation FD, thus the Commission’s 2008 Guidance is as applicable to social media channels of corporate communication as it is to disclosure made through the company’s website.
The 2008 and 2013 releases present public companies with alternative disclosure mediums in corporate websites and social media platforms, yet public companies should not risk violating Regulation FD by solely disclosing material public information on a single alternative disclosure medium unless the Company has consistently informed the investing public in its filings with the SEC and in public releases that the Company may, and reserves the right to, disclose material information on specifically disclosed websites and social media sites that are available and accessible to the investing public. The SEC should be credited for proactively integrating new technologies, such as social media, to help ensure the promotion of efficient and transparent capital markets but it is essential for public companies to realize that Regulation FD isn’t necessarily satisfied by disclosing material public information though alternative disclosure mediums.
Accordingly, while alternative means of disclosure may present attractive and less burdensome options for disclosure, public dissemination of material information by public companies seeking to avoid possible regulatory issues in the 21st century should strongly consider disclosing public information through both alternative and standard disclosure methods in order to ensure compliance with Regulation FD. Moreover, in order to use such alternative disclosure methods, public companies should consistently and prominently disclose in their SEC filings and press releases the specific websites and /or social media sites where the Company and/or its affiliates may disclose material information about the Company and ensure that the public is able to view such material information on such sites with equal access and at the same time.
 Rulemaking for Edgar System, S.E.C. Release No. 33-6977, 1993 WL 57730 (Feb. 24, 1993) [58 FR 14628].
 Mandated Electronic Filing and Web Site Posting for Forms 3, 4 and 5, S.E.C. Release Nos. 33-8230, 34-47809, 35-27674, IC-26044; File No. S7-52-02, 68 FR 25788-01, at * 25789 (Tuesday, May 13, 2003).
 Id., at p. 25789
 Interactive Data to Improve Financial Reporting, S.E.C. Release Nos. 33-9002, 34-59324, 39-2461; 2009 WL 223616, at *1 (Jan. 30, 2009). [74 FR 6776].
 Id., at p.1
 Commission Guidance on the Use of Company Web Sites, S.E.C. Release No. 34-58288, 2008 WL 4068202, at *6 (Aug. 1, 2008).
 Id., at p.6
 Id., at p.7
 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, S.E.C. Release No. 34-69279, 2013 WL 5138517, at *1 (Apr. 2, 2013).
 Id., at p.3
 Id., at p. 4
 Id., at p.7
Editors Note: Lawrence G. Nusbaum is a name partner of Gusrae Kaplan Nusbaum PLLC and the Department Head of the Firm’s Corporate/Securities practice. Mr. Nusbaum is one of the leading corporate/securities and transactional attorneys in the United States with more than 25 years of experience representing public and private, domestic and international entities, broker-dealers, investment banks, hedge funds, private equity firms, high net worth individuals, registered representatives, financial advisors, officers and directors, board of directors and special committees in a wide range of corporate and securities matters. For more information about Mr. Nusbaum or Gusrae Kaplan Nusbaum PLLC please visit their website: GusraeKaplan.com
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