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:
- whether and how the company has advised investors and the market of its web site and that it contains important information (for example, including in its press releases and periodic SEC reports the company’s web site address and stating that its web site is a source for important information about the company);
- whether the company has made investors and the market aware that it will post important information on its web site and whether it has a pattern or practice of posting that information on its web site;
- whether the company’s web site is designed to lead users efficiently to information about the company;
- the extent to which information posted on the company’s web site is regularly picked up by the market and media (the SEC suggests that companies with smaller market capitalizations and less of a marketing following may need to take more affirmative steps to advise investors and others that information is available on the company’s web site);
- the steps the company has taken to make its web site accessible, including the use of “push” technology (i.e., the pre-arranged updating of news or other selected information on a computer user’s desktop interface through periodic communications over the worldwide web) to advise the market of the availability of such information;
- whether the company keeps its web site current and accurate;
- whether the company uses other methods to disseminate the information and whether those methods are the predominant methods the company uses to disseminate information; and
- the nature of the information.
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:
- separately identify the material as historical or previously posted (for example, dating the material to convey its historical nature); and
- group such material with other historical or archived statements in a separate section of the company’s site.
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:
- consider explaining the context for the hyperlink;
- consider the nature and content of hyperlinked information in deciding how to explain the context for the hyperlink (for example, if a hyperlink is to a highly favorable article, the company should consider explaining the sources and why the link is provided to avoid an inference that the company is commenting on or approving the article’s accuracy, while a link to a media page with recent articles, both positive and negative, may need only a title such as “Recent News Articles”); and
- consider including “exit notices” or “intermediate screens” that indicate that the hyperlink is to third-party sources.
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:
- use of appropriate titles;
- use of additional explanatory language;
- use and placement of hyperlinks; and
- use of “layered” or “tiered” format.
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).
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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.