The staff of the SEC’s Division of Corporation Finance recently published a series of Compliance and Disclosure Interpretations (CDIs) regarding the use of social media, such as Twitter, in business combinations, securities offerings, proxy solicitations and tender offers (the guidance can be found here. (Questions 110.01, 110.02, 164.02, 232.15 and 232.16)). The new guidance permits social media users to satisfy SEC legend requirements — if the communication platform imposes certain limitations on the number of characters or amount of text — by using an active hyperlink to the full legend. While the new guidance is not a free pass for all social media platforms, it enhances the ability to use character-limited social media platforms such as Twitter (but not Facebook or LinkedIn) in connection with these transactions.
Description of the Guidance
The new guidance recognizes both the growing interest in social media as a means to communicate with security holders and potential investors and the technological limitations imposed by some platforms. Although not official statements, rules or regulations of the SEC, the CDIs provide useful information and insight into the SEC’s views on social media usage in these contexts.
Under the new guidance, using an active hyperlink to the required legend will suffice in certain circumstances. Use of a hyperlink to satisfy the legend requirement is permitted only where:
- The electronic communication is distributed through a platform that has limitations on the number of characters or amount of text that may be included in a communication;
- The inclusion of the legend, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
- The communication contains an active hyperlink to the required legend and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.
The communications covered by the guidance include:
- Communications made pursuant to Rule 165 under the Securities Act of 1933, as amended (the Securities Act), in connection with a pending business combination in which securities will be offered.
- Offering announcements made in reliance on Securities Act Rule 134 and free writing prospectuses in accordance with Securities Act Rule 433 relating to securities offerings.
- Proxy solicitations before delivery of a proxy statement pursuant to Rule 14a-12 under the Securities Exchange Act of 1934, as amended (the Exchange Act).
- Pre-commencement tender offer communications under Exchange Act Rules 13e-4, 14d-2 and 14d-9.
Re-tweets in Public Offering Context
The SEC staff also clarified that, in the context of a securities offering, a third-party re-transmission (such as a “re-tweet”) of an issuer’s social media electronic communication originally made in compliance with Securities Act Rule 134 or 433 would generally not be attributable to the issuer. The guidance would require that in this context (1) the third party that re-transmits the issuer’s communication is neither an offering participant nor acting on behalf of the issuer or an offering participant; and (2) the issuer has no involvement in the third-party’s re-transmission beyond having initially prepared and distributed the communication in compliance with Securities Act Rule 134 or 433. In these circumstances, the re-transmission will not be attributable to the issuer, and the issuer would not be required to ensure the re-transmission’s compliance with Securities Act Rule 134 or 433.
Implications and Limitations of the Guidance
Because the active hyperlink solution is only available where inclusion of the legend in its entirety, together with the other information, would cause the communication to exceed the platform’s character or text limit, it is only useful for microblogging platforms such as Twitter. Though issuers and investors also make use of other social media platforms having certain character and length limitations, the new guidance does not provide any breathing room to use a hyperlinked legend where a social media platform allows for enough characters to include a full legend. For example, the guidance does not allow those using popular social media platforms such as LinkedIn and Facebook to max out a post with other content to avoid including the full legend. While companies are increasingly using Twitter for investor communications, anecdotal evidence suggests that a common use of Twitter feeds in these contexts is by shareholder activists looking to air their grievances. The new guidance may result in increased Twitter usage in activist campaigns, making it all the more important that companies monitor third-party social media communications about them. Companies may also wish to consider capitalizing on their increased freedom to use social media to expand their capabilities and comfort level with these communication avenues so they are better prepared to use them in the event of activist shareholder activity.
It is also important to recognize what the new guidance does not do. The guidance does not address communications made using multiple transmissions. Each transmission via Twitter feed is limited to 140 characters, so Twitter users often tweet in a series of multiple transmissions. The guidance does not specify whether it is sufficient to include the hyperlink in the first tweet only or if it also needs to be included in each subsequent tweet. Particularly in the context of the types of transactions covered by the guidance, absent further guidance from the staff, we recommend including the legend hyperlink in each tweet. The guidance also does not specify how to “prominently convey” that important information is provided through the legend hyperlink, though hyperlinks identified as “Important Information” would seem to be sufficient. Given the character limits of Twitter and other microblogging platforms, we expect there will be pressure to reduce the number of characters as much as possible by abbreviating the hyperlink text. It remains unclear to what extent words can be abbreviated and still convey the importance of the linked information.
The recently issued CDIs also do not remove restrictions on information that can be included in communications or eliminate the requirements to file these communications with the SEC via EDGAR. If companies use Twitter for communications related to business combinations, securities offerings, proxy solicitations and tender offers, they will need to have processes in place not only to ensure that the legend hyperlink is properly included in tweets, but also to timely file these communications with the SEC. Members of the SEC staff have also indicated that the staff intends to monitor communications by the parties involved in business combinations to confirm they are making the required filings.
The new guidance significantly clarifies the SEC’s stance regarding social media usage as a means to communicate with security holders and potential investors in business combinations, securities offerings, proxy solicitations and tender offers. Below are some practical measures issuers should consider in light of the new guidance:
- Adhere to a social media policy and deal communications plan. The transaction deal team should include a small group of communications personnel and other authorized social media users who are knowledgeable about the legend requirements. Implement procedures and processes that, particularly in light of an accelerated deal pace, help ensure that communications via electronic social media include the required legend hyperlinks and are filed via EDGAR before the filing deadline on the same day.
- Prohibit directors, officers and affiliates from re-tweeting or “liking” company or third-party social media communications. Though the guidance clarifies that third-party re-transmissions may not be attributable to the company, that exception is unlikely to apply to communications made by directors and officers, meaning that their re-transmissions of company or third-party communications must comply with the legend requirements. Unless a company can ensure inclusion of the required legends and same-day SEC filing of their social media communications, directors and officers should be prohibited from re-tweeting or “liking” company or third-party social media communications. Additionally, because the exception does not apply to “offering participants”, affiliates participating in a secondary offering should also be counseled to refrain from “re-tweeting” or “liking” these communications.
- Monitor and make use of social media communications. The new guidance facilitates use of social media by issuers and activist investors alike. Companies should monitor third-party social media communications relating to or about them and consider increasing their use of Twitter, microblogging and other social media platforms. Companies may be better suited to face an activist shareholder social media campaign if they develop a stronger social media presence and expand their capabilities with these platforms.
- Proceed with caution. The use of social media in these contexts is a developing practice that will continue to evolve as future platforms are introduced and technologies advance. This recent guidance may not translate easily to new technologies. If companies find themselves in a situation not addressed by the guidance, as an alternative to proceeding without guidance or to refraining from using the new technology, consider engaging in a dialogue with the SEC staff.
- Do not lose sight of other SEC rules. The SEC’s anti-fraud rules apply to social media communications. Even at 140 characters, tweets should not omit material information and should include adequate context to avoid being misleading. In addition, the new guidance does not change existing Regulation FD guidance, which provides that social media is only a Regulation FD-compliant recognized channel of distribution if a company has taken adequate steps to inform the market that it intends to disclose information through that channel.