On April 21, the SEC’s Division of Corporation Finance issued Compliance and Disclosure Interpretations (CDIs) clarifying the staff’s position on the communication by social media of certain required disclosures for securities offerings, proxy solicitations and tender offers. The SEC staff advises that, if specified conditions are satisfied, issuers and other transaction participants may include in a communication an active hyperlink to any cautionary statement or legend required under SEC rules to accompany the other information conveyed in the transmission. The new guidance endorses a common approach employed by market participants to overcome the limitations of some social media platforms (particularly Twitter) on the number of characters or amount of text that can be included in a communication. The staff also indicates in the CDIs that under certain circumstances a re-transmission of an issuer’s offering-related communication by a third party via social media (such as a “re-tweet” on Twitter) will not be attributable to the issuer.
The staff issued the new guidance in response to the growing interest in the use of social media to communicate with security holders and potential investors. Although the CDIs are not rules, regulations or statements of the SEC, they provide important guidance by the Division of Corporation Finance. The new CDIs (numbered 110.01, 110.02, 164.02, 232.15 and 232.16 under the caption “Securities Act Rules”) are available here.
SEC rules permit issuers and other parties engaged in registered securities offerings, business combinations, proxy contests and tender offers to use written communications outside of the registration statement, proxy statement or tender offer document if the party includes a specific cautionary statement or legend in the communications. The communications subject to the rules include:
- Announcements in connection with securities offerings pursuant to Rule 134 under the Securities Act of 1933, which permits issuers to communicate specified information regarding an offering (relating, for instance, to its launch or pricing) in written communications that will not be deemed to constitute a prospectus. Rule 134 announcements must include legends stating, among other matters, that a registration statement has been filed but has not yet become effective, the securities may not be sold prior to such effectiveness and any offer to buy securities may be revoked prior to a notice of its acceptance given after the effective date, and indicating where investors can obtain a written prospectus and certain price information.
- Free writing prospectuses under Securities Act Rule 433, which permits issuers in some circumstances to provide investors with written communications containing information not included in the prospectus. A free writing prospectus must contain a legend advising the recipient of the communication to read the prospectus and other filed documents for information about the issuer and the offering, and including directions on how to obtain the documents.
- Communications under Securities Act Rule 165 relating to a securities offering made in connection with a business combination. Rule 165 requires each communication relying on the rule to contain a legend advising investors to read the relevant documents filed or to be filed with the SEC and explaining how investors can obtain the documents.
- Solicitations made by an issuer or other party before delivering a proxy statement, pursuant to Rule 14a-12 under the Securities Exchange Act of 1934. Rule 14a-12 requires the soliciting communication to include a legend advising security holders to read the proxy statement once it is available, explaining that the proxy statement and other relevant documents may be obtained on the SEC’s web site, and describing the documents that will be made available without charge by the participants in the solicitation.
- Communications with respect to a tender offer under Exchange Act Rules 13e-4, 14d-2 and 14d-9, which permit pre-commencement communications. The pre-commencement communications must include legends similar in form to those required under Rule 14a-12, but relating to the tender offer statement and the company’s recommendation statement.
The full text of required cautionary statements and legends cannot always be presented in communications disseminated via social media technology platforms that impose limitations on the number of characters or amount of text that can be included in a communication. Twitter, for example, permits the use of only 140 characters in each “tweet.” Many issuers and other market participants have responded to this limitation by embedding in their communications hyperlinks to the cautionary disclosures required to accompany the communications. Before the issuance of the new guidance, however, some members of the SEC staff informally had questioned whether disclosure through hyperlinks was sufficient to satisfy the requirements of the foregoing rules.
SEC staff guidance
Hyperlinks. The staff’s new guidance will permit issuers and other parties to comply with the communications rules by using in their social media transmissions an active hyperlink that connects to the text of the required legend or cautionary statement. (CDI 110.01, with respect to Securities Act Rule 134; CDI 164.02, with respect to Securities Act Rule 165 and Exchange Act Rules 14a-12, 13e-4, 14d-2 and 14d-9; CDI 232.15, with respect to Securities Act Rule 433) Use of hyperlinks, however, is subject to satisfaction of the following conditions:
- The electronic communication must be distributed through a platform that has technological limitations on the number of characters or amount of text that can be included in the communication
- The inclusion of the required statements in their entirety, together with the other information, must cause the communication to exceed the limit on the number of characters or amount of text
- The communication must contain an active hyperlink to the required statements and prominently convey, through introductory language or otherwise, that important or required information is provided through the hyperlink
The new guidance dispels the legal uncertainty about the hyperlinking approach that has discouraged parties from using some social media outlets to disseminate information about their transactions. It is unlikely, however, that the CDIs will represent the staff’s last word on this subject. The staff’s conditions place important limitations on the use of hyperlinks, especially in connection with the use of popular social media platforms such as LinkedIn, Facebook and others that do not impose a cap on the number of characters or amount of text that may be included in a communication. The conditions also do not clarify the language the staff would consider adequate to “prominently convey” that the information provided through the hyperlink is important or required. Users of social media will have to allocate scarce space to address this requirement in their tweets and other transmissions. In addition, the staff’s guidance fails to address the permissibility of other strategies for overcoming space limitations in some platforms, such as the inclusion of required cautionary statements in attached image files.
Re-transmissions. The staff’s new CDIs also address the effect of re-transmission of offering-related communications under Securities Act Rule 134 or Rule 433. (CDIs 110.02 and 232.16) The staff explains that the re-transmission would not be attributable to the issuer if (1) a third party that re-transmits an issuer’s message via social media 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 (other than having initially prepared and distributed the communication in compliance with either Rule 134 or Rule 433). This guidance is consistent with the SEC’s position, expressed in Securities Act Release No. 33-8591, that whether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant turns on whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information. The issuer will not be liable for any non-compliance with securities laws resulting from re-transmissions that are not attributable to it.
Regulation FD; Antifraud Rules. Nothing in the new guidance changes the SEC’s position, expressed in April 2013 in its report of investigation of Netflix under Section 21(a) of the Exchange Act, that issuers may use social media outlets such as Facebook and Twitter to disseminate material, nonpublic information in compliance with Regulation FD (Fair Disclosure), but only so long as the issuers provide advance public notice of the social media outlets they will use for this purpose and take other prescribed actions to establish that the outlets are a “recognized channel of distribution” for the broad and non-exclusionary communication of such information. We discussed this guidance in the SEC Update we issued on April 16, 2013, which can be viewed here. Users of social media also should recall that the SEC’s antifraud rules continue to apply to communications of the type discussed in the CDIs regardless of the means by which a communication is made.