The SEC has issued an interpretive release that provides guidance on the use of company web sites to disclose information to investors. The release became effective upon publication in the Federal Register on August 7, 2008. The SEC last provided comprehensive guidance regarding company web sites in 2000. In its recent release, the SEC acknowledges that investors are increasingly relying on the Internet for information to aid their investment decisions, and that "where access is freely available to all, use of electronic media is at least equal to other methods of delivering information or making it available to investors and the markets." In providing updated guidance, the SEC hopes to encourage companies to continue to develop their web sites in compliance with the federal securities laws so that they can serve as effective information and analytical tools for investors. However, in light of the subjective nature of many of the factors set forth in the release, a company which is satisfied with its current practice of distributing press releases or filing Form 8-Ks to disclose developments in its business, or a smaller company whose web site is less frequently accessed, will likely maintain their current disclosure procedures while monitoring the response to the new guidance.
The release focuses primarily on:
- when information posted on a company web site is "public" for purposes of the applicability of Regulation FD;
- company liability for information on a company web site – including previously posted information, hyperlinks to third-party information, summary information and overviews, and the content of interactive web sites such as blogs and electronic shareholder forums;
- the types of controls and procedures advisable with respect to such information; and
- the format of information presented on a company web site, with the focus on readability, not printability.
The release does not address the treatment of information on a company web site under the Securities Act. The SEC's 2000 guidance and its 2005 release regarding securities offering reform continue to apply to such information.
The Application of Regulation FD to Information on a Company Web Site
Selective disclosure enables "a privileged few [to] gain an informational edge – and the ability to use that edge to profit – from their superior access to corporate insiders, rather than from their skill, acumen, or diligence." The SEC adopted Regulation FD in 2000 to address the problem of selective disclosure of material information by requiring that when an issuer, or any person acting on its behalf, discloses material, non-public information regarding the issuer or its securities to securities market professionals and stockholders who may trade on the basis of that information, the issuer must make public disclosure of that information. If the selective disclosure was intentional, the public disclosure must be made simultaneously. For unintentional selective disclosure, the public disclosure must be made promptly. The required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
The release provides guidance as to:
- whether and when information posted on a company web site would be considered "public" so that subsequent private discussions or disclosure of the posted information would not violate Regulation FD; and
- whether posting information on a company web site, in and of itself, may be sufficient to make the required public disclosure in the event of selective disclosure.
Whether and When Information on a Company Web Site Is "Public" For Purposes of Regulation FD
In evaluating whether information disclosed solely by posting on a company web site is "public," the release advises a company to consider whether and when:
- the company web site is a recognized channel of distribution, which will depend on the steps that the company has taken to alert the market to its web site and its disclosure practices, as well as the use by investors and the market of the company's web site;
- posting of information on the company web site disseminates the information in a manner making it available to the securities marketplace in general, which will depend on (1) the manner in which information is posted on the company web site and (2) the timely and ready accessibility of such information to investors and the markets; and
- there has been a reasonable waiting period for investors and the market to react to the posted information.
The release provides the following non-exclusive list of factors for a company to consider in evaluating whether the company web site is a recognized channel of distribution and whether the company information on that site is effectively posted and accessible:
- whether and how the company lets
- investors and the markets know that the company has a web site and that they should look at the company's web site for information. For example, does the company include disclosure in its periodic reports (and in its press releases) of its web site address and that it routinely posts important information on its web site?
- whether the company has made investors and the markets aware that it will post important information on its web site and whether it has a pattern or practice of posting such information on its web site;
- whether the company's web site is designed to lead investors and the market efficiently to information about the company, including information specifically addressed to investors, whether the information is prominently disclosed on the web site in the location known and routinely used for such disclosures, and whether the information is presented in a format readily accessible to the general public;
- the extent to which information posted on the web site is regularly picked up by the market and readily available media, and reported in, such media or the extent to which the company has advised newswires or the media about such information and the size and market following of the company involved. The release notes that companies that are well-followed by the market and the media may know that the market and media will pick up and distribute the disclosures they make on their web sites, whereas companies with less of a market following, which may include companies with smaller market capitalizations, may need to take more affirmative steps so that investors and others know that information is or has been posted on the company's web site;
- the steps the company has taken to make its web site and the information accessible, including the use of "push" technology, such as RSS feeds, or releases through other distribution channels, either to widely distribute such information or advise the market of its availability;
- whether the company keeps the web site current and accurate;
- whether the company uses other methods in addition to its web site posting to disseminate the information and whether and to what extent those other methods are the predominant methods the company uses to disseminate information; and
- the nature of the information.
The release emphasizes that whether a reasonable waiting period has been provided for investors and the market to react to the posted information depends on the particular facts and circumstances, including many of the factors considered above in evaluating whether the web site is a recognized channel of distribution and whether the company information is effectively posted and accessible. In particular, the release notes that if the information is sufficiently important, the company should consider taking additional steps to alert investors and the market to the fact that important information will be posted, such as filing or furnishing the information with the SEC or issuing a press release with the information prior to posting. The release also notes that the question of what constitutes a reasonable waiting period has frequently been litigated in the context of insider trading, and these cases may provide guidance to companies for purposes of Regulation FD. The common practice has been to allow at least one full trading day to pass after release of information by larger companies, and two full trading days in the case of smaller and medium size companies.
If information is posted on a company web site that is a recognized channel of distribution and is effectively posted and accessible, and investors and the market are provided a reasonable waiting period to react to the posted information, then such information will be deemed to be public, and subsequent selective disclosure of that information – such as to an analyst in a private conversation – would not trigger Regulation FD. However, if information on the company web site is not deemed to be public, then subsequent selective disclosure of that information, if material, may trigger Regulation FD.
Whether Posting Information on a Company Web Site Can Satisfy the Public Disclosure Requirement of Regulation FD
Regulation FD requires that once selective disclosure has been made, public disclosure must be made simultaneously, in the case of intentional disclosure, or promptly, in the case of unintentional disclosure. In the release adopting Regulation FD, the SEC stopped short of concluding that disclosure on a company web site would, itself, be an acceptable method of public disclosure. In the release, the SEC acknowledges that "technology has evolved and the use of the Internet has grown such that, for some companies in certain circumstances, posting of the information on the company's web site, in and of itself, may be a sufficient method of public disclosure under . . . Regulation FD." The release directs a company to determine whether and when posting on its web site is "reasonably designed to provide broad, non-exclusionary distribution of the information to the public" by consideration of (1) the factors described above for determining whether the web site is a recognized channel of distribution and whether the information is effectively posted and accessible and (2) the web site's capability to meet the simultaneous or prompt timing requirement for public disclosure. The release notes that it remains the company's responsibility to evaluate whether a posting on the company web site, whether alone or in combination with other methods of disclosure, would satisfy the public disclosure requirement of Regulation FD.
The Application of the Antifraud Provisions of the Exchange Act to Information on a Company Web Site
In the release, the SEC reiterates that the antifraud provisions of the federal securities laws apply to company statements made on the Internet in the same way they would apply to any other statement made by, or attributable to, a company. In particular, the release discusses a company's responsibility for previously posted material, hyperlinks to third-party information, summary information and overviews, and interactive web site features, such as blogs and electronic shareholder forums. The antifraud provisions of the federal securities laws, including Exchange Act Section 10(b) and Rule 106-5, generally prohibit making material misstatements or omissions of fact in connection with the purchase and sale of securities. To be material, there must be a substantial likelihood that the information would be viewed by the reasonable investor as having significantly altered the "total mix" of available information. Whether information on a company's web site is considered to be part of the "total mix" of information depends on the facts and circumstances. The release emphasizes that a company can take certain steps that affect whether such information is part of the total mix of information.
Previously Posted Information
The antifraud provisions of the federal securities laws apply to statements contained in posted materials when such statements are initially made or subsequently affirmatively restated or reissued. In addition, an affirmative restatement or reissuance may create a duty to update the statement so that it is accurate as of the date it is restated or reissued. In the release, the SEC makes it clear that just because investors can access previously posted materials or statements on a company web site does not in itself mean that such previously posted materials or statements have been reissued or republished for purposes of the antifraud provisions of the federal securities laws, that the company has made a new statement, or that the company has created a duty to update the materials or statements. To assure that investors understand that the posted materials or statements speak as of an earlier date or period, previously posted information should be:
- separately identified as historical or previously posted materials or statements, including, for example, by dating the posted materials or statements; and
- located in a separate section of the company's web site containing previously posted materials or statements.
Hyperlinks to Third-Party Information
Under the antifraud provisions of the federal securities laws, a company can be held liable for third-party information to which it provides a hyperlink from its web site if the information could be attributable to the company. Third-party information is attributable to the company, if the company has:
- involved itself in the preparation of the information (the "entanglement theory"); or
- explicitly or implicitly endorsed or approved the information (the "adoption theory").
In its 2000 release, the SEC provided the following non-exclusive list of factors for a company to consider in determining whether it has adopted hyperlinked information:
- context of the hyperlink – what the company says about the hyperlink or what is implied by the context in which the company places the hyperlink;
- risk of confusing investors – the presence or absence of precautions against investor confusion about the source of the information; and
- presentation of the hyperlinked information – how the hyperlink is presented graphically on the web site, including the layout of the screen containing the hyperlink.
In the new release, the SEC focuses on whether the context of the hyperlink and the hyperlinked information together create a reasonable inference that the company has implicitly approved or endorsed the hyperlinked information. In particular, the SEC suggests that the company should:
- explain why the hyperlink is being provided by, for example, explicitly noting that the hyperlinked information supports a particular assertion on the company web site;
- consider the nature and content of the hyperlinked information in deciding how to explain the context for the hyperlink – for example, if the hyperlinked information is highly specific, the company should consider explaining the source of the information and why the company is providing the hyperlink; while if the hyperlinked information consists of recent news articles, both positive and negative, about the company, a title such as "Recent News Articles" may be all the explanation that is needed to avoid being considered to have adopted the materials; and
- consider the use of "exit notices" or "intermediate screens" to denote that the hyperlink is to third-party information.
The SEC reiterates its view that a disclaimer alone is not sufficient to insulate a company from responsibility for information that it makes available to investors, whether through a hyperlink or otherwise, if it knows, or is reckless in not knowing, that such information is materially false or misleading. Although a disclaimer alone may not be sufficient, a disclaimer may be useful when used in conjunction with other methods to distance the company from third-party content.
Summary Information or Overviews
In the release, the SEC notes that summary information or an overview on a company web site can be appropriate and helpful to investors, such as when it relates to lengthy or complex information. When using summaries or overviews, however, a company should consider ways to alert readers to the location of the detailed disclosure from which such summary information is derived or upon which such overview is based, as well as to other information about the company on the company web site. To highlight the nature of summary or overview information, the SEC recommends:
- using an appropriate title or heading that conveys the summary, overview or abbreviated nature of the information;
- using additional explanatory language to identify the text as a summary or overview and the location of the more detailed information;
- placing a summary or overview section in close proximity to hyperlinks to the more detailed information from which the summary or overview is derived; and
- using a "layered" or "tiered" format to organize the web site presentation such that it presents the most important summary or overview information about a company on the opening page, with embedded links that enable a reader to drill down to more details by clicking on the links.
Interactive Web Site Features: Blogs and Electronic Shareholder Forums
In the release, the SEC emphasizes that it is interested in promoting robust use by companies of their web sites, including making the company web sites interactive. Since all communications made by or on behalf of a company are subject to the antifraud provisions of the federal securities laws, however, the SEC urges companies to take steps to put in place controls and procedures to monitor statements made by or on behalf of the company on electronic forums. The SEC cautions companies hosting or participating in blogs or electronic shareholder forums:
the antifraud provisions of the federal securities laws apply to these forums, and companies are responsible for statements made by them or on their behalf on their web sites or those of third parties. Employees acting as representatives of the company cannot avoid their responsibilities in these forums by purporting to speak in their individual capacities;
- companies cannot require investors to waive protections under the federal securities laws as a condition to entering or participating in a blog or forum; and
- although a company is not responsible for the statements that third parties post on the company web site, and is not obligated to respond to or correct misstatements by third parties, the company remains responsible for its own statements, including statements made on its behalf, in a blog or electronic forum.
The Application of Disclosure Controls and Procedures to Information on a Company Web Site
A company's principal executive officer and principal financial officer must certify in each periodic report that they are responsible for establishing and maintaining disclosure controls and procedures, that such controls and procedures have been designed to ensure that material information relating to the company is made known to them, that they have evaluated the effectiveness of such controls and procedures as of the end of a reporting period, and that they have disclosed in the company's periodic report for that reporting period their conclusions about the effectiveness of those controls and procedures.
In the release, the SEC confirms that, where the SEC rules permit a company to satisfy a disclosure obligation under the Exchange Act by posting information on the company web site rather than in an Exchange Act report, the failure to make that disclosure would result in an incomplete Exchange Act report. Thus, a company must make sure that its disclosure controls and procedures are designed to address the disclosure of such information on its web site. On the other hand, disclosure controls and procedures do not apply to information on a company web site other than information posted as an alternative to being provided in an Exchange Act report.
Format and Readability of Information on a Company Web Site
Acknowledging that the nature of online information is increasingly interactive and not static, the release confirms that information presented on a company web site does not need to be in printer-friendly form, unless expressly required by the SEC rules. For example, under the SEC's recent e-proxy rules, electronically posted proxy material must be presented in a format convenient for reading online and printing on paper.
The guidance contained in the release is principles-based and does not consist of bright-line tests. It requires the examination of, and the application of its principles to, the relevant facts and circumstances. Furthermore, an interpretive release provides guidance on existing laws and regulations and does not impose new obligations. Although such guidance is not binding on the courts, it may be accorded substantial deference, particularly where the guidance interprets the SEC's own regulations.
Companies should review the content of their web sites, the context of historical information and hyperlinks, and their disclosure controls and procedures for information disclosed on their web sites, in light of the recommendations made by the SEC in this recently published guidance.