This is the third part of our Securities Law 101 series. Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law. We hope that this series will prevent some of the most common mistakes management teams make. We will periodically publish posts examining different aspects of securities law.
In the wake of the SEC recommending an enforcement action against Netflix, Inc. and its CEO for social media postings that potentially violate Regulation FD, public companies must increasingly ensure that they understand, and comply with, their obligations under Regulation FD.
So what is Regulation FD? Adopted by the SEC in 2000, Regulation FD (a/k/a Regulation Fair Disclosure) prohibits companies from selectively disclosing material nonpublic information to analysts, institutional investors, and others. Citing instances of selective disclosure to certain institutional investors and/or securities analysts and the resulting profits or avoidance of loss that come at the expense of those without knowledge of the disclosure, the SEC intended to promote full and fair disclosure of information by issuers.
Under Regulation FD, when an issuer, or person acting on its behalf, discloses material nonpublic information to certain people (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), the issuer must publicly disclose that information. Importantly, where a disclosure is intentional, the issuer must simultaneously make public disclosure of the nonpublic material information. However, where the disclosure is non-intentional, the issuer must “promptly” make public disclosure. 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 such as press releases disseminated by a wire service.
Regulation FD does not define what is considered “material,” but the adopting release cites the existing case law’s interpretations of the term with respect to other SEC rules and regulations. Essentially, information is considered material if there is a “substantial likelihood that a reasonable shareholder would consider it important” in making an investment decision or if the facts “would have been viewed by the reasonable investor as altering the total mix of information made available.” Notably, the adopting release also lists the following information that, if disclosed, would likely qualify as material:
- Earnings information
- Mergers, acquisitions, tender offers, joint ventures, or changes in assets
- New products or discoveries, or developments regarding customers or suppliers (e.g., the acquisition or loss of a contract)
- Changes in control or in management
- Change in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report
- Events regarding the issuer’s securities, like defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders, public or private sales of additional securities
- Bankruptcies or receiverships
Since its adoption, Regulation FD has fundamentally altered the way that public companies communicate with the outside world. With these companies increasingly expanding their reach into new markets and mediums, one can expect that Regulation FD will continue to do so in the future. Traditional concerns associated with Regulation FD and the communications that may trigger its obligations stem from unilateral communications to analysts and shareholders. But also of large concern in complying with Regulation FD are outside questions directed to the company from investors (i.e., at conference calls, shareholder meetings, etc.), where sloppy answers can possibly require disclosure under the regulation. Further, in the new age of social media, companies must exercise caution with communications through non-traditional outlets such as corporate blogs, Facebook and Twitter. Essentially, the development of a strong understanding of the regulation’s triggers and requirements and the continual reassessment of compliance efforts are key to ensuring that a public company’s communications to the outside world are (and will continue to be) violation-free.