In August 2008, the Securities and Exchange Commission (the “SEC”) published an interpretive release to provide guidance regarding the use of company Web sites for publication of information pertinent to investors.
“We recognize that allowing companies to present data in formats different from those dictated by our forms or more technologically advanced than EDGAR [the SEC’s on-line reporting system] may be beneficial to investors,” the SEC said.
The latest policy interpretation should enable companies to make greater use of their Web sites for the purpose of disseminating information to investors. In appropriate situations, as described in this update, companies will be able to issue material information primarily or exclusively through their Web sites rather than having to use newswire services and/or filings with the SEC.
This interpretive release provides particular guidance as to:
- How Exchange Act rules are applicable to company Web sites;
- When information posted on a company Web site shall be considered “public” for purposes of compliance with Regulation FD, which prohibits unfair selective disclosures in order to provide broad, non-exclusive distribution of material information;
- When a company shall have liability exposure under the anti-fraud provisions for information published on its Web site; and
- Web site formats, controls and procedures that are advisable under Exchange Act rules.
As a result of this guidance, it is now possible for companies to safely provide selective disclosures to small groups if the material information disclosed was first posted to a company Web site under circumstances that pass the tests described herein (see “REGULATION FD and ‘PUBLIC’ DISCLOSURES ON WEB SITES”). A company may also have the option, in appropriate situations, of using its Web site to make a curative public disclosure when an inappropriate selective disclosure has been made.
See SEC Release No. 34-58288 available at http://www.sec.gov/rules/final.
- The SEC has invited further comments (to be submitted prior to November 5, 2008) regarding the use of technology for disclosure of information to investors.
OVERVIEW OF EXCHANGE ACT RULES ON WEB SITES
In the interpretive release, the SEC explained that its rules promoting the use of Web sites fall primarily into two categories: (1) rules encouraging delivery of documents in electronic format or via electronic access; and (2) rules allowing companies to make information disclosures to investors as a supplement to or alternative to EDGAR.
Companies have a choice of utilizing either their own Web sites or the EDGAR system for making certain disclosures, such as:
- Disclosures of non-GAAP financial measures and Regulation G required information;
- Disclosures of audit, nominating or compensation committee charters; or
- Disclosures of material amendments to a code of ethics or a material waiver of a code of ethics.
Companies may utilize their own Web sites to disclose information that is also available through the EDGAR system in many instances. For example:
- Companies may disclose their Web site addresses in annual reports for purposes of directing investors there to obtain more EDGAR-related information;
- Mutual funds may disclose in their prospectuses whether EDGAR-field shareholder reports are available on the Web; or
- Companies may post on their Web sites notices of intent to delist or deregister securities.
Certain foreign private issuers can even use their Web sites as the primary or stand-alone source of information about the company as a basis for maintaining registration or reporting exemptions.
REGULATION FD AND “PUBLIC” DISCLOSURES ON WEB SITES
The SEC acknowledged that it had never addressed the question of when a company Web site disclosure could be considered “public” for purposes of determining whether a subsequent selective disclosure to a limited audience might violate Regulation FD.
Regulation FD provides that a public issuer cannot make selective private disclosures of material information, such as disclosures to small groups of investment professionals or key shareholders. If a selective disclosure is made inadvertently, then the issuer must promptly disclose that information publicly as required by Rule 100 of Regulation FD. If a company purposely plans to make a selective disclosure, then that private disclosure must be made simultaneously with an appropriate public disclosure.
In order to avoid problems created by possible selective disclosures under Regulation FD, companies may now want to consider first making those disclosures public through the use of their Web sites.
Evaluating whether information provided on a Web site is sufficiently public so that a subsequent disclosure of that information to a select group does not violate Regulation FD is a function of a three-part test, the SEC stated for the first time.
The first element of the test is whether a company Web site is a recognized “channel of distribution” for information, which depends on the steps the company has taken to alert the markets to the site and the actual use of that site by investors.
Second, posting of information on a company site must disseminate the information in a manner that makes it available to the securities marketplace in general. This test turns on the manner in which information is posted and the timely, ready accessibility of such posted information to the marketplace. For instance, this test takes into account:
- Whether and how companies let investors and the markets know about the Web site;
- Whether the company has a pattern of posting important information on its site;
- Whether the format and design is calculated to lead investors and the market to information in an efficient, readily available manner;
- The extent to which posted information is regularly picked up by the market and the media;
- Whether the company keeps the site current and accurate in all respects; and
- The nature of the information.
Finally, the SEC said that there must be a reasonable waiting period for investors and the market to react to information posted on the Web before otherwise selective disclosures can be made. What constitutes a “reasonable waiting period” depends upon:
- The size and market following for the company;
- The extent to which investment related information is regularly accessed via the company site;
- The steps the company has taken to make investors and the market aware of the site as a key source of important information;
- Whether the company has taken steps to actively disseminate the information; and
- The nature and complexity of the information.
If an inadvertent selective disclosure has been made that would violate Regulation FD prior to any “public” Web site posting, the company must furnish a Form 8-K or use an alternative method of disclosure to provide broad, non-exclusionary distribution pursuant to Rule 101(e). The SEC said that the use of the Internet has grown to the point where some companies in appropriate circumstances could now promptly post information on their Web sites as a public curative disclosure under Rule 101(e).
ANTI-FRAUD PROVISIONS APPLICABLE TO WEB SITE STATEMENTS
The SEC stated that the anti-fraud provisions of the federal securities laws, which generally prohibit material misstatements or omissions of fact about investor information, apply to company statements on the Internet in the same way as they would to other statements.
Effect of Accessing Previously Posted Materials on the Web
Companies that maintain previously posted materials on their Web sites should not generally be treated as though they are “reissuing” or “republishing” such statements for purposes of the anti-fraud provisions of the securities laws, according to the SEC.
However, the anti-fraud provisions may apply where a company affirms the reissuance of the statement, or if it is not apparent to a reasonable person that the posted materials speak as of a certain earlier date.
Hyperlinks to Third-Party Information
The SEC affirmed that a company can be held liable for third-party information to which a company hyperlinks investors through the company Web site in certain circumstances. Liability is dependent upon whether the company has: (1) involved itself in the preparation of the information; or (2) explicitly or implicitly endorsed the information.
Furthermore, any liability analysis must begin with the assumption that providing a hyperlink indicates that the company believes the information on the hyperlinked site may be of interest to investors, according to the SEC.
As a result, companies wishing to avoid such liability were advised to consider: (1) posting information about how and why hyperlinks are chosen; (2) providing hyperlinks to news articles or analysis that are both positive and negative in tone; and (3) using clear disclaimers. However, the SEC emphasized that a disclaimer alone is not sufficient to insulate a company from responsibility for hyperlinked information.
Use of Summaries on Web Sites
Companies were cautioned that if they use summaries or overviews on their Web sites, they should consider alerting readers to the location of more detailed disclosures from which such summary information was derived, as well as the location of any supplemental clarifying information.
Companies using summaries were also advised to consider the following techniques:
- Using appropriate titles or headings to explain the abbreviated nature of the summary information;
- Using additional explanatory language, not only to identify the text as a summary or overview, but to direct investors to more detailed information;
- Using hyperlinks to more detailed information from which the summary is derived; and
- Using embedded links that enable a reader to “drill down” to more detailed information that provides a full complement of all relevant and current information about the company.
Interactive Web Site Tools
The SEC also addressed the use of interactive Web site features, such as “blogs” and “electronic shareholder forums.” Companies were advised that statements made in interactive forums would be subject to the anti-fraud provisions of the securities laws if those statements are made by the company, endorsed by the company, or made or endorsed by a person acting for the company.
In addition, companies were warned that they cannot require investors to waive protections under the federal securities laws as a condition to entering an interactive format, such as a blog or investor forum.
DISCLOSURE CONTROLS AND PROCEDURES
There are a number of Exchange Act rules that require certain company certifications of controls and procedures. Among other things, a company’s chief executive officer and chief financial officer must certify that they are responsible for establishing and maintaining disclosure controls.
The SEC made it clear that if a company elects to satisfy its disclosure obligations in whole or in part by posting information on its Web site, then disclosure controls and procedures would apply to such information.
THE FORMAT OF WEB SITE INFORMATION
“We do not think it is necessary that information appearing on company Web sites [must] satisfy a printer-friendly standard unless our rules explicitly require it,” the SEC stated, noting nonetheless that the electronic notice and access model does require a printer-friendly format for information that is presented pursuant to notice and access rules. Other information that is not required by rule but presented voluntarily is subject only to requirements of clarity, readability and proper context.