Background

The Securities and Exchange Commission (the "SEC") has published an interpretive release, Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (the "Release"), providing guidance to companies and issuers of securities on the use of company websites to disclose information to investors. The Release, which became effective August 7, 2008, is intended to encourage companies to develop their websites in compliance with the federal securities laws so that such websites can serve as effective analytical tools for investors by being a vital source of information about a company's business, financial condition and operations. The Release is intended to provide guidance to those companies that are utilizing websites to supplement their required SEC filings.

Since the adoption of the Securities Act of 1933 and the Securities Exchange Act of 1934 (the "Exchange Act"), the foundation of securities regulation in the United States has rested upon timely disclosure of relevant information to investors and the securities markets. Historically, companies have disclosed information to investors and the markets by mailing reports to stockholders, filing periodic reports with the SEC and issuing press releases. As technology has advanced, the Internet, the SEC's Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system, and electronic communications have modernized the disclosure system. More and more investors are turning to the Internet and company websites as their main source of information before making investment decisions.

The Release provides guidance to companies posting information on their websites, including (1) when information posted on their website is considered "public" for purposes of the "fair disclosure" requirements of Regulation FD; (2) the application of the antifraud provisions of the federal securities laws to information posted on company websites; (3) the types of controls and procedures advisable with respect to posting information; and (4) the appropriate format of the information presented on the website.

Regulation FD

Regulation FD was adopted by the SEC in 2000 to level the playing field among institutional and non-institutional investors by requiring that companies that disclose material, non-public information, on a selective basis, whether intentionally or inadvertently, make the information "public" through disclosure. This public disclosure can be achieved by filing or furnishing the selectively disclosed information on a Form 8-K or through the use of an "alternative" disclosure method that must be "simultaneous" in the case of an intentional disclosure and "prompt" in the case of an unintentional or inadvertent disclosure. In the Release, the SEC addresses the issues of whether information posted on a website is considered to be "public" so that disclosure on the website does not violate Regulation FD, and also whether the website can be used as a disclosure method to make public a previous selective disclosure of non-public information.

The Release provides that information posted on a company website may be considered public if (1) the website is a "recognized channel of distribution," (2) posting of information on the website properly "disseminates" the information to the securities marketplace in general, and (3) the information has been posted long enough for investors and the market to react to the information. Whether the company's website is a "recognized channel of distribution" depends on the steps the company has taken to alert the market of its website and the use by investors and the market of the website. Information posted on a website can be considered properly "disseminated" to the marketplace based on the manner in which information is posted (i.e., the website's design) and the accessibility of the information to investors and the markets. Finally, determining whether the information has been posted for a reasonable period to allow investors and the market to react to the information depends on the particular facts and circumstances of the dissemination, including, among other things, the size and market following the company, the extent to which investor-oriented information is regularly assessed on the website, and the nature and complexity of the information.

In the event of intentional or inadvertent selective disclosure of material non-public information, posting the information on the company website may constitute a sufficient alternative method of public disclosure under Regulation FD, if posting of the information is "reasonably designed to provide broad, non-exclusionary distribution of the information to the public." To determine whether this requirement has been met, companies must again look to see if the website is a recognized channel of distribution and whether the information has been properly disseminated. Additionally, companies must consider the ability of their websites to meet the "simultaneous" and "prompt" timing requirements for public disclosure once a selective disclosure has been made.

When the SEC adopted Regulation FD in 2000, it stated in a release that a company's posting information on its website would not, by itself, satisfy Regulation FD's requirement for public disclosure. Nonetheless, the SEC noted in that release that as technology evolves and more investors have access to the Internet, posting to websites could become a viable alternative method for public disclosure under Regulation FD. In the current Release, the SEC acknowledges that technology and usage of the Internet and websites have come to a point for some companies where such disclosure would become public. That said, the Release does not provide a bright-line assurance of compliance with Regulation FD, nor does posting to a company website satisfy the requirements for disclosure of material information required to be reported on a Form 8-K or other periodic report. Consequently, companies may rely on the Release for guidance on getting the most out of their website disclosure, but if information is particularly important or time-sensitive, companies should continue to file the information with the SEC and issue a press release.

Antifraud and Other Exchange Act Provisions

The antifraud provisions of the federal securities laws, including Section 10(b) and Rule 10b-5 of the Exchange Act (which prohibit an issuer from making material misstatements and omissions of fact in connection with the purchase and sale of securities), apply to company statements made on websites. The Release provides guidance to companies concerning the liability that could result from (1) posted information being deemed "republished" information, (2) hyperlinks to third-party information, (3) the use of summary information and (4) statements made in interactive blogs and forums.

To alleviate concerns that information posted online can be accessed and relied upon at any time by investors, the Release makes it clear that maintaining historical information on a website does not constitute "republishing" of that information each time it is accessed. However, the antifraud rules do apply to statements at the time they are made and also in situations where a company restates or reissues a historical statement. To avoid this type of liability, companies should organize their websites so that historical or previously posted statements and materials are separately identified (by dating the material, for example) and located in a separate section of the website that contains only previously posted statements and materials.

Companies can be held responsible for material misstatements or omissions of fact contained in hyperlinks to third-party websites, if the third-party information appears to have been "adopted" or endorsed by the company. To avoid liability companies must ensure that the context of the hyperlink and the hyperlinked information make clear that the company has neither approved nor endorsed the hyperlinked information. Companies should post an explanation about why the hyperlink is being provided and the context of the hyperlinked information. Companies may also want to consider providing "exit notices" and "intermediate screens" to help avoid confusion as to the source of the third-party information. It is important to note, however, that a company will not be shielded from antifraud liability for hyperlinking to information that it knows, or is reckless in not knowing, is materially false or misleading.

Another area of potential antifraud liability lies in the posting of summaries of information, particularly financial information. While summaries can be helpful for investors, companies should ensure that such summaries, standing alone, cannot be perceived by the reasonable investor as anything more than a summary. To avoid liability, companies should clearly identify summary information through explanations and appropriate titles, and alert readers to the location of the more detailed disclosure from which the summary information has been derived.

Companies today also are including many more interactive features on their websites, such as blogs and shareholder forums, which raise questions about responsibility for the accuracy of their content. While these features can be informal in nature, companies should keep in mind that statements made on a blog or in a forum by the company or an agent of the company will be treated like any other company statement when it comes to liability arising under the antifraud provisions of the Exchange Act. Companies cannot require participants to waive protections under the federal securities laws as a condition to participating in a blog or forum, because doing so would violate the anti-waiver provisions of the Exchange Act. Generally, a company is not responsible for statements made by third parties on a blog or forum that is part of its company website. However, a company can be held liable if it adopts or otherwise endorses or approves the statement.

Disclosure Controls and Procedures

Companies should be aware that posting information on their websites may implicate Exchange Act rules governing CEO and CFO certification requirements relating to disclosure procedures and controls. Exchange Act rules permit companies to post certain information—non-GAAP financial measures, committee charters, amendments to code of ethics—on their website, rather than filing them with the SEC. If a company chooses to post information on its website in lieu of filing it with the SEC, it must be certain that its disclosure controls and procedures encompass the review of any disclosure of information made on the company's website, and not just the information filed with the SEC.

Format of Information and Readability

The SEC has required that some information on company websites, such as proxy materials, be presented in a manner that is convenient for both reading and printing. Acknowledging that information on company websites is becoming increasingly interactive and not static, the SEC will not require information appearing on company websites to satisfy printer-friendly standards, unless already specifically required by SEC rules. The Release notes that inability to print a particular browser screen that has been designed to be viewed online is not inherently detrimental to its readability.

What This Means

In view of the principles suggested in the SEC's guidance, each issuer should carefully review its disclosure policy and website.