News

SEC guidance on the use of company websites

News Brief
August 11, 2008

By Cyndey Posner

The SEC has posted guidance on the use of company websites under the Exchange Act and the antifraud provisions of the federal securities laws. When the SEC last provided guidance on the electronic delivery of disclosure documents in 2000, the staff indicated that they expected to revisit the guidance to update and supplement it as appropriate. In light of the technological advances in communications on the internet, the increased percentage of investors with internet access and the development and proliferation of company websites since 2000, the SEC determined that the time was right to issue new guidance. In fact, the staff have "reached a point where the availability of information in electronic form – whether on EDGAR or a company web site – is the superior method of providing company information to most investors, as compared to other methods." As a result, we are happy to report that the guidance provided in the new release is somewhat less impractical than the staff's previous effort. The guidance does not address insider trading, Rules 144 or 144A or key issues arising out of the use of company websites under the Securities Act; these issues were addressed in connection with Securities Offering Reform in 2005.

The guidance focuses principally on:

  • When information posted on a company website is "public" for purposes of Reg FD;
  • Company liability for information on company websites, including previously posted information, hyperlinks to third-party information, summary information and interactive websites;
  • The types of controls and procedures advisable with respect to this information; and
  • The format of information presented on a company website, with the focus on readability, not printability.

Use of Company Websites for Disclosure for Purposes of Reg FD

In earlier releases, the SEC stated that, at the time, posting of information on a company's website was not, by itself, a sufficient means of public disclosure for purposes of Reg FD. The new interpretive release provides guidance as to the circumstances under which information posted on a company website (whether by or on behalf of the company) would be considered "public" for purposes of evaluating the (1) applicability of Reg FD to subsequent private discussions or disclosure of the posted information and (2) satisfaction of Reg FD’s "public disclosure" requirement.

Whether and When Information Is "Public" for Purposes of the Applicability of Regulation FD. The first question is whether information posted on a company website is sufficiently "public" that a subsequent disclosure of that information to a person enumerated in Reg FD would not be a disclosure of non-public information. That is, if information on a company’s website is public, then subsequent selective disclosure of that information, such as to an analyst in a private conversation, would not trigger Reg FD because the information, even if material, would not be non-public. Two key issues in making that determination are (1) whether the information has been "disseminated in a manner calculated to reach the securities market place in general through recognized channels of distribution," and (2) whether public investors have been "afforded a reasonable waiting period to react to the information." Thus, companies must consider whether and when:

  • a company website is a recognized channel of distribution;
  • posting of information on a company website disseminates the information in a manner making it available to the securities marketplace in general; and
  • there has been a reasonable waiting period for investors and the market to react to the posted information.

Unfortunately, the factors a company must examine to make the determination involve a facts-and-circumstances analysis that can be subjective in many respects. It remains to be seen whether practices will develop to allow a company to attain a sufficient comfort level to relay solely on its website for this purpose or whether instead the website will be used only as a back-up.

Recognized Channel. Whether a company’s website is a recognized channel of distribution of information will depend on the steps the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website.

Adequate Dissemination. Analyzing the concept of "dissemination" through a "changed lens," the SEC now believes that the test for Reg FD purposes in connection with a subsequent disclosure should focus on

  • the manner in which information is posted on a company website, and
  • the timely and ready accessibility of the information to investors and the markets.

Application of the factors the SEC identifies to consider in determining whether information is "posted and accessible" involves a facts-and-circumstances analysis. These factors include:

  • Whether and how a company lets investors and the markets know that the company has a website and that it is a resource for information about the company. For example, does the company include disclosure in its periodic reports (and in its press releases) of its website address and state that it routinely posts important information on its website?
  • Whether the company has made investors and the markets aware that it will post important information on its website and whether it has a pattern or practice of doing so;
  • Whether the website is designed to lead investors and the market efficiently to information about the company, including information specifically addressed to investors, whether the information is prominently disclosed on the website in the location known and routinely used for these disclosures and whether the information is presented in a format readily accessible to the general public;
  • The extent to which information posted on the website is regularly picked up by the market and readily available media, and reported in, the media or the extent to which the company has advised newswires or the media about the information and the size and market following of the company involved. For example, in evaluating accessibility to the posted information, companies that are well followed by the market and the media may know that the market and the media will pick up and further distribute the disclosures they make on their websites. On the other hand, companies with less of a market following, often smaller cap companies, may need to take more affirmative steps to alert investors and others that information has been posted on the company’s website and that the website is a resource for current information;
  • The steps the company has taken to make its website and the information accessible, including the use of "push" technology, such as RSS feeds, or releases through other distribution channels either to widely distribute the information or to advise the market of its availability (although the release expressly states that the use of push technology, while it may be one factor to consider in evaluating accessibility, is not necessary for the information to be considered disseminated), as well as the extent to which a company's internet infrastructure can accommodate spikes in traffic volume that may accompany a major company development;
  • Whether the company keeps its website current and accurate;
  • Whether the company uses other methods, in addition to its website posting, to disseminate the information and whether and to what extent those other methods are the predominant methods the company uses to disseminate information; and
  • The nature of the information.

Reasonable Waiting Period. The release emphasizes that the length of time that constitutes a reasonable waiting period depends on the circumstances of the dissemination. The factors to consider may include:

  • the size and market following of the company;
  • the extent to which investor-oriented information on the company website is regularly accessed;
  • the steps the company has taken to make investors and the market aware that it uses its company website as a key source of important information about the company, including the location of the posted information;
  • whether the company has taken steps to actively disseminate the information or the availability of the information posted on the website, including using other channels of distribution of information; and
  • the nature and complexity of the information.

For example, important information may require additional steps to alert investors and the market to the fact that important information will be posted, such as by issuing a press release or furnishing an 8-K with the information (perhaps raising the implicit question of whether, for important information, a company can rely solely on its website for dissemination). Adequate advance notice of the particular posting, including the date and time of the anticipated posting, will help alert investors and the market to the future posting, facilitating broad dissemination of the information. The SEC notes that insider trading cases may be useful to provide some guidance regarding reasonable waiting periods.

Satisfaction of Public Disclosure Requirement of Reg FD. Once a selective disclosure has been made, Rule 101(e) of Reg FD requires the company to file or furnish a Form 8-K or use an alternative method of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. In contrast to the SEC's prior position, the SEC now believes that technology and common usage have evolved sufficiently so that, "for some companies in certain circumstances," posting of the information on the company’s website, in and of itself, may be a sufficient method of public disclosure under Rule 101(e). The test will be whether website postings are "reasonably designed to provide broad, non-exclusionary distribution of the information to the public," measured, in this case, by reference to the factors outlined above for the first two elements of the analysis: whether the website is a recognized channel of distribution and whether the information is "posted and accessible" and, therefore, "disseminated." Companies will also need to consider the capability of their websites to meet the simultaneous or prompt timing requirements for public disclosure once a selective disclosure has been made. Posting on a blog, by or on behalf of the company, would be treated the same as any other posting. The release confirms that the determination of whether the method of disclosure will satisfy the alternative public disclosure provision of Reg FD remains the company’s responsibility (but seems to beg the question of whether the staff will be second-guessing these decisions)..

Antifraud and Other Exchange Act Provisions

Company statements made on the internet, including postings on and hyperlinks from company websites, are subject to the antifraud provisions of the federal securities laws in the same way as any other statement made by, or attributable to, a company. In the context of Rule 10b-5, a misstatement or omission is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available." The determination of whether information posted on, or hyperlinked from, a company’s website is part of that total mix requires a facts-and-circumstances analysis, including application of the "buried facts" doctrine.

In addition, certain rules allow companies to disclose information exclusively on their websites rather than filing the information on EDGAR. While the provisions of Exchange Act Section 13(a) and Exchange Act Rules 13a-1 and 12b-20 apply to Exchange Act filings, those provisions generally do not apply to disclosures on company websites. However, if a company fails to satisfy a website disclosure option that is an alternative to filing or furnishing an Exchange Act report, an action could be brought under the Exchange Act reporting provisions based on the company’s failure to file the report.

Effect of Accessing Previously Posted Information. Not too surprisingly, in connection with previously posted information, companies have continued to express concerns regarding issues of republication and the related duty to update. (Could it possibly be because the SEC had previously said that "a statement may be considered to be ‘republished’ each time that it is accessed by an investor or, for that matter, each day that it appears on the web site"?) To provide some clarity, the SEC now states (in a major but welcome flip-flop) that. as a general matter, it believes "that the fact that investors can access previously posted materials or statements on a company’s web site does not in itself mean that such previously posted materials or statements have been reissued or republished for purposes of the antifraud provisions of the federal securities laws, that the company has made a new statement, or that the company has created a duty to update the materials or statements." However, if a company affirmatively restates or reissues a statement, the antifraud provisions would apply, and the company would have a duty to update the statement so that it is accurate as of the date it is restated or reissued.

Where it is otherwise not apparent to the reasonable person that the posted materials speak as of a certain date or earlier period, companies should:

  • Separately identify posted materials or statements as historical or previously posted, including, for example, by dating the posted materials or statements; and
  • Locate them in a separate section of the company’s website containing previously posted materials or statements.

For the Securities Act analog to these requirements, see Rule 433(e)(2).

Hyperlinks to Third-Party Information. Because, under Rule 10b-5, a company can be liable for third-party information to which it hyperlinks from its website and which could be attributable to the company, liability for hyperlinks to third-party information contained on company websites remains a continuing concern. Whether third-party information is attributable to a company depends upon whether the company has: (1) involved itself in the preparation of the information (through "entanglement") or (2) explicitly or implicitly endorsed or approved the information (through "adoption"). The liability concern is especially acute because, in the 2000 release, the SEC had said that "in the context of a document required to be filed or delivered under the federal securities laws, we believe that when a company embeds a hyperlink to a web site within the document, the company should always be deemed to be adopting the hyperlinked information. In addition, when a company is in registration, if the company establishes a hyperlink (that is not embedded within a disclosure document) from its web site to information that meets the definition of an 'offer to sell,' 'offer for sale' or 'offer' under Section 2(a)(3) of the Securities Act, a strong inference arises that the company has adopted that information for purposes of Section 10(b) of the Exchange Act and Rule 10b-5."

Factors (non-exhaustive) that the SEC had previously identified to be considered in assessing "adoption" of material hyperlinked from a website include:

  • Context of the hyperlink, i.e., what the company says about the hyperlink or what is implied by the context in which the company places the hyperlink;
  • Risk of confusing the investors, i.e., the presence or absence of precautions against investor confusion about the source of the information; and
  • Presentation of the hyperlinked information, i.e., how the hyperlink is presented graphically on the website, including the layout of the screen containing the hyperlink.

The current release offers further guidance on the application of the adoption theory. In the SEC's view, to determine whether a company should be liable for a third-party statement, the focus should be on whether the company has explicitly or implicitly approved or endorsed the statement, that is, whether "the context of the hyperlink and the hyperlinked information together create a reasonable inference that the company has approved or endorsed the hyperlinked information."

One important factor is what the company says. Providing the hyperlink indicates that the company believes that the link will be of interest; to avoid confusion, the company should consider explaining the context for the hyperlink by making explicit, rather than implicit, why the hyperlink is included. Obviously, a third-party hyperlink on a customer-oriented page will have different implications from a securities law perspective as compared with a hyperlink to a research analyst’s report on an investor-oriented page. If the company is making a selective choice to hyperlink to a specific piece of third-party information (e.g., a particular analyst's report or laudatory article), it will likely indicate that the company has a positive view or opinion of the linked information. In that context, the company should explain the source and why the company is providing the hyperlink to avoid the inference that the company is approving its accuracy or was involved in its preparation. If the link is more general and less selective (e.g., including both positive and negative reports), the company may consider providing a more general explanation, such as "Recent News Articles."

A company may use "exit notices" or "intermediate screens" to denote that the hyperlink is to third-party information, but that method will not necessarily be determinative (e.g., if the company links to only one bullish analyst's report and does not mention that all the other analyst reports are negative on the company’s prospects). A failure to use "exit notices" does not necessarily mean that the company has adopted the third-party information.

A disclaimer alone will not insulate a company from responsibility for information that it makes available to investors, whether through a hyperlink or otherwise, that it knows, or is reckless in not knowing, is materially false or misleading.

Summary Information. With respect to companies’ use of summaries or overviews to present information, particularly financial information, on their websites, the SEC believes that summaries can be helpful to investors, but they can also be problematic if they stand alone, do not alert readers to where more detailed information is located or may not reasonably be perceived to be summaries. As a result, companies should consider using appropriate explanatory language to identify summary or overview information and alert readers to the location of the detailed disclosure from which summary information is derived, as well as to other information about a company, on a company’s website.

Companies should consider the following techniques for summaries:

  • Use of appropriate titles. Add an appropriate title or heading that conveys the summary, overview or abbreviated nature of the information;
  • Use of additional explanatory language. Provide additional explanatory language to identify the text as a summary and indicate the location of more detailed information;
  • Use and placement of hyperlinks. Including nearby hyperlinks to the more detailed information from which the summary is derived could clarify the context (the information might be considered as presented together, analogous to the "envelope" theory, which describes how and when information from different sources may be deemed to have been delivered together); and
  • Use of "layered" or "tiered" format. Present the most important summary information on the opening page, with embedded links that enable the reader to drill down to more detail by clicking on the links, allowing viewers to follow a logical path and obtain increasingly greater details.

Interactive Website Features. The release provides the following guidance with respect to interactive website communications, such as "blogs" and "electronic shareholder forums":

The antifraud provisions of the federal securities laws apply to blogs and to electronic shareholder forums. Companies are responsible for statements made by them, or on their behalf, on their own or on third-party websites. Employees acting as representatives cannot avoid company responsibility by purporting to speak in their "individual" capacities. Accordingly, companies should consider adopting controls and procedures to monitor statements made by or on behalf of the company on these types of interactive communications.

Companies cannot require investors to waive protections under the federal securities laws as a condition to entering or participating in a blog or forum. The SEC believes that any term or condition of a blog or shareholder forum requiring users to agree not to make investment decisions based on its content or disclaiming liability for damages is inconsistent with the federal securities laws and violates the anti-waiver provisions of the federal securities laws. A company is not responsible for the statements that third parties post on a company-sponsored website (unless it adopts or is entangled with those statements), nor is a company obligated to respond to or correct misstatements made by third parties.

Disclosure Controls and Procedures

Website postings could implicate certifications relating to disclosure controls and procedures where companies have elected to satisfy any Exchange Act disclosure obligations by posting that information on their websites as an alternative to providing that information in Exchange Act reports. In that case, failure to make those disclosures on the company’s website would result in an Exchange Act report being incomplete. As a result, disclosure controls and procedures must be designed to address website disclosure of this information. However, disclosure controls and procedures do not apply to other disclosures of information on a company’s website. Nevertheless, because these other disclosures are subject to antifraud liability, companies should consider whether these disclosures are in compliance with Reg FD, the Securities Act, the federal proxy rules and other federal securities laws.

Format of Information and Readability

In light of the increasingly interactive nature of information posted on websites, the SEC does not believe that information appearing on company websites must satisfy a printer-friendly standard unless SEC rules explicitly require it (e.g., electronically posted proxy materials under the notice-and-access model). If special software is required to view information aimed at investors, the SEC believes the company should make a free, downloadable version of the software available on the website or indicate where the required software may be downloaded free of charge.

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