SEC Issues Guidance on Use of Company Web Sites
 
February 20, 2009
 
Laurie L. Green- Ft Lauderdale

Overview

On August 1, 2008, the SEC issued an interpretive release (the “Web Site Release”) on how companies can use their web sites to provide information to investors in compliance with the federal securities laws, particularly with respect to the Securities Exchange Act of 1934 (the “Exchange Act”).¹ The guidance clarifies the applicability of Regulation FD (Fair Disclosure) and the federal securities laws’ antifraud provisions to material posted on company web sites. The interpretive guidance became effective on August 7, 2008.

The SEC has not issued guidance regarding web sites since 2000. Given the development and proliferation of company web sites since 2000, and the SEC’s expectation that technological advances will increase the quality and quantity of information available to investors on web sites, as well as the speed at which such information reaches the markets, the SEC decided to provide additional web site guidance.

The SEC has supported the use of web sites by permitting issuers to post certain information on their web sites, rather than providing the information in the applicable filings. This information includes the company’s nominating, audit and compensation committee charters, and Non-GAAP financial measures. Additionally, the SEC requires companies with a corporate web site to post their reports filed under Section 16 of the Exchange Act and has adopted rules which require companies to post their XBRL data on their web sites. In the Web Site Release, the SEC encourages issuers to develop their web sites in compliance with the federal securities laws so that company web sites can provide effective information and analytical tools for investors.

SEC Guidance

The Web Site Release provides clarification and guidance on the following issues:

• when company web site information is considered “public” within the context of Regulation FD
• liability for material posted on company web sites, including previously posted information, hyperlinks to third-party information, summary information and the content of interactive web sites
• advisable controls and procedures over web site materials
• format of the information on company web sites, with the focus on readability, not printability

“Public” Web Site Information

The Web Site Release focuses on the applicability of Regulation FD to web site postings. The SEC provides guidance on whether information posted on a company’s web site is considered public, the point at which it becomes public and if Regulation FD would apply to any subsequent selective disclosure. Regulation FD was designed to prevent companies from disclosing nonpublic information to select people who in turn use the information to their benefit. Under Regulation FD, information that is selectively disclosed must be disclosed to the public thereafter in a Form 8-K or another disclosure which will make the information public. If it was intentional disclosure, it must be disclosed simultaneously. If it was unintentional disclosure, it must be disclosed promptly.

The SEC addressed two issues when looking at the applicability of Regulation FD to information posted on a company’s web site:

1. whether and when information previously posted on a company’s web site becomes public such that a subsequent selective disclosure need not comply with Regulation FD
2. whether once a selective disclosure has been made, posting information on a company’s web site would be considered an alternative public disclosure method, meeting Regulation FD such that an additional filing would not be required

When Does Information on a Web Site Become Public?

According to the Web Site Release, companies should take the following into consideration in determining whether information on a web site is public in order to assess whether a subsequent disclosure may implicate Regulation FD:

• Is the company web site viewed as a recognized channel of distribution?
• Does the web site posting of the information disseminate the information to the securities marketplace in general?
• Has there been a reasonable waiting period for investors and the market to react to the posted information?

In order for a company web site to fall within the category of a recognized channel of distribution, it is important that:

• the company has notified the market about its web site and disclosure practices
• investors and the market use that particular company’s web site for information
• investors and the market are aware that the company may post information on its web site

The company must also determine if it is reaching the securities marketplace by posting information on its web site. The SEC has stated that in order to determine if something is disseminated to the public, the company should concentrate on two things:

1. how the information is posted
2. how accessible the information is to investors

The Web Site Release provides several additional factors that highlight how to determine if a company web site is a recognized channel of distribution and whether the web site disseminates the information as follows:

• whether a company has informed investors and the market that it has a web site where they should go for information and how it informed them
• whether a company has told investors and the market that important information will be posted on its web site and whether it can illustrate a pattern of posting material on its web site
• whether the information can be accessed efficiently, is prominently disclosed, located in a place known and normally used for the disclosure of information, and is in a format that is accessible to the public (a company cannot post information on its web site that is hidden and hard to find, yet claim the information is public)

Media Coverage

Additional factors include whether the media also looks at the web site and reports the information, as this will help ensure that the information is disseminated to the public. However, smaller companies may not be followed by the media and may need to take additional steps to verify that the public knows about the web site and postings. A company should also evaluate how accessible the information is to investors and the market and whether or not the company uses “push technology” to help the information become disseminated. However, the SEC stated that this technology is not required. A company should look at whether its web site is current and accurate, other ways it distributes the information and the nature or type of information.

Waiting Period

The SEC has stated that it is necessary to have a reasonable waiting period before a subsequent selective disclosure is made. This allows investors a chance to react to the information. The reasonableness of the waiting period is based on a facts and circumstances determination which varies for each individual company and the type of information. The Web Site Release sets out the following factors to use when assessing the reasonableness of the waiting period:

• size and market following of the company
• whether investor information posted on the company web site is regularly accessed by investors
• the steps taken by the company to ensure that the investors and the marketplace know that the company posts important information on its web site
• whether the company actively disseminates and makes available the information posted on the company web site, including the use of other channels of distribution
• the nature and complexity of the information

If the information posted on the web site is found to be public, Regulation FD will not be applicable to subsequent selective disclosure of the information to another individual. In any case, if the information is important, a company should still ensure that the marketplace has knowledge that the information is posted on its web site. The SEC has advised that a company may want to consider issuing a press release or providing the date the information will be posted.

Alternative Method of Public Disclosure

In addressing the issue of whether posting information on a company web site could qualify as an alternative method of public disclosure under Regulation FD once a selective disclosure is made, the Web Site Release states that under certain facts and circumstances, publication of the information on a company web site could constitute an alternative method of public disclosure such that filing or furnishing a Form 8-K will not be required under Regulation FD. The Web Site Release states that companies should apply the factors listed above to determine if the web site is a “recognized channel of distribution and whether the information is ‘posted and accessible,’ and therefore, ‘disseminated.’” Additionally, a company must ensure that it can comply with the simultaneous or prompt disclosure requirements. According to the SEC, it is ultimately the company’s responsibility to make sure that the company complies with the Regulation FD public disclosure requirements.

Liability

The federal securities laws’ antifraud provisions, including Section 10(b) and Rule 10b-5 of the Exchange Act, also apply to company statements made on the Internet in the same way they apply to any other statement made by, or attributable to, the company. The Web Site Release states that under Rule 10b-5, it is necessary to look at whether “disclosure of the omitted fact would have been viewed by reasonable investors as having significantly altered the ‘total mix’ of information made available.” Again, the SEC points out that it is a facts and circumstances evaluation of whether the web site material is a part of the “total mix.”

As previously discussed, the SEC also permits certain disclosures by the issuer on its company web site as opposed to filing the information in its Exchange Act reports. However, if the company fails to put the information on its web site, it can be liable for such failure to file under the Exchange Act.

Accessing Previously Posted Information

One liability concern that the SEC addresses is whether companies can be liable for previously posted information that is still located on the company’s web site which investors later access. The Web Site Release provides that in situations where an investor accesses historical data, the company is not considered to be reissuing or republishing the information on its web site. Instead, the SEC reiterates that the antifraud provisions apply when the statements were originally made or if the company actually restates or reissues a statement. While there is generally no requirement to update previously made statements, if a company affirmatively reissues or restates a statement, then it may need to update it.

However, the SEC advises companies to take additional steps to ensure that investors know the materials were previously posted and are not current. This can be accomplished by identifying the materials as historical or dating the materials and posting them separately from the new information.

Hyperlinks

Under Section 10(b) of the Exchange Act and Rule 10b-5, a company can be held liable for third-party information to which it hyperlinks from its web site and which could be attributed to the company. The SEC previously addressed liability for hyperlinked information in its 2000 interpretive release on electronic media (the “Electronic Media Release”).² As discussed in the Electronic Media Release, whether the information will be attributed to the company depends on whether the company helped prepare the information (which is known as the “entanglement theory”) or if the company endorsed it or approved it (which is known as the “adoption theory”). The Electronic Media Release sets out factors to determine if the hyperlinked information has been “adopted” by the company as follows:

• the context of the hyperlink, including anything expressly said or implied by the company about the hyperlink
• whether investors will be confused about the source of the information
• how the hyperlink is presented

In the Web Site Release, the SEC provides additional guidance regarding the application of the adoption theory. The SEC states that the key question in the hyperlinking context is: “Does the context of the hyperlink and the hyperlinked information together create a reasonable inference that the company has approved or endorsed the hyperlinked information?” The SEC suggests making the context explicit by specifically stating the reasons why the hyperlink is included. For example, the company could explicitly endorse the hyperlinked information, in which case the company would be liable for such information. Alternatively, the company could simply note that the third-party web site contains information that may be interesting to the reader.

Additionally, the SEC states that the degree to which the company picked a particular hyperlink will help illustrate the company’s views of that hyperlink. For example, if the company only includes a hyperlink to a favorable news article, the company should include explanatory language about the source and why the company is providing the hyperlink in order to avoid the inference that the company is approving the article or was involved in its preparation. Alternatively, if the company posts all articles, both positive and negative, about the company, the risk that the company has liability for a particular article may be reduced. In this case, a title such as “Recent News Articles” may be the only explanation necessary to avoid the company being considered to have adopted the materials.

The SEC also suggests using “exit notices” or “intermediate screens” which notify the reader that he or she has exited the company web site and is entering the third-party area. Another way to differentiate the company’s web site from the hyperlink is to provide a disclaimer. However, the Web Site Release states that a mere disclaimer is not enough to escape liability and warns that specific antifraud disclaimers of liability are against the federal securities laws underlying policies.

Summaries

The SEC supports the use of summaries, however, it is important that companies describe and explain that the information is a summary and state where the full information is located. The goal is ultimately to avoid investor confusion by ensuring the investor understands the information is merely a summary. The SEC advises using titles, explanatory language, hyperlinks to the complete information and a layered format through which an investor can obtain more information by clicking on a link.

Interactive Web Site Features

There are now blogs and forums, which the SEC seeks to encourage, where individuals and companies post information. The SEC advises companies to consider having controls and procedures to monitor statements made by the company and its employees in these interactive web site forums.
The SEC also provides guidance for companies hosting or participating in such blogs or forums, as follows:

• the federal securities laws’ antifraud provisions apply to statements made by companies, or on their behalf, on their web sites or on third-party web sites
• employees acting as representatives of the company should be aware of their responsibilities in blogs or forums, which cannot be avoided by purporting to speak in their “individual” capacities
• companies cannot make investors agree to waive protections under the federal securities laws prior to entering a blog or forum or as a condition to entry or participation
• a company is not responsible for statements third parties post on a company sponsored web site, nor is a company obligated to correct third-party misstatements

Disclosure Controls and Procedures

Companies can satisfy certain Exchange Act disclosure requirements by posting the information on their web site rather than including the information in an Exchange Act report. If a company elects to include the required information on its web site, disclosure controls and procedures would apply to such information. This also means that CEO and CFO certifications regarding the effectiveness of disclosure controls and procedures will cover required disclosure that is included on the web site. However, such controls and procedures do not apply to any other information provided on the company web site.

Format

The Web Site Release focuses on the readability of the materials. While the SEC normally does not require a printable format for web site material, it is important to look at the specific SEC rules applicable to the information being posted. For example, companies using the notice and access e-proxy model must ensure that the electronically-posted proxy statement is presented in a format that is convenient both for reading online and printing.

Recommended Actions

Companies should evaluate their web site and posted information for compliance with the Web Site Release as follows:

Regulation FD

Based on the general guidance in the Web Site Release, initially only large companies with an active trading market and widespread media following will be able to use their web sites as the sole means of publicly disclosing information. Further, companies will need to consider the disclosure requirements of the NYSE, AMEX and NASDAQ. NYSE and AMEX currently require that material information be disseminated by a press release to the major wire services. However all companies wishing to use their web site as a potential means of publicly disclosing information for Regulation FD purposes should adjust their activities and web site based on the guidance in the Web Site Release:

• Disclose in all press releases and periodic reports what its web site address is and that it routinely posts important information on its web site.
• Show a pattern or practice of posting important information on its web site.
• The home page of the web site should include a prominent link to the investor relations page. Then there should be a prominent link on the investor relations page to the information. The title of the link could be “Material Information.” Companies may also want to consider adding a link to the home page such as “New Investor Information.” A company cannot post information on its web site that is hidden and hard to find, yet claim the information is public.
• Review the web site often to make sure it is current and accurate. Move older information to archives.
• If the information is important, issue a press release or file or furnish a Form 8-K stating that important information will be posted, along with the date and time of the anticipated posting.
• For smaller companies, consider using push technology, such as an RSS feed.
• To determine if the press is reviewing the information, monitor the extent to which the press references or reports on the information in the web site.

Hyperlinks

To minimize potential antifraud liability for third-party information to which the company provides a hyperlink:

• Explain that the third-party web site contains information that may be of interest or of use to the reader.
• Do not hyperlink only to positive news articles about the company – hyperlink to all recent news articles or analyst reports, both positive and negative, under the title “Recent News Articles.”
• Do not hyperlink only to analysts who provide positive outlooks on the company’s prospects – hyperlink to all analysts.
• Use “exit notices” or “intermediate screens” to clarify that the hyperlink is to third party information.
• Include a disclaimer that the company is not adopting the third-party information.
• Review the third-party information – a company will be liable for hyperlinking to information that it knows is materially false or misleading.

Summaries

To highlight the nature of summary or overview information:

• Use “Summary” or “Overview” as a title for the information.
• Explain that the text is a summary or overview and specify the location for the more detailed information.
• Place the summary or overview close to hyperlinks to the more detailed information.
• Organize the web site presentation so that the most important summary or overview information about the company is on the opening page, with embedded links that enable the reader to drill down to more detail by clicking on the links to, for example, financial statements, strategy, products, management and corporate governance.

Blogs and Forums

If the company or its employees participate in blogs and forums:

• Specify who can speak on behalf of the company.
• Have controls and procedures in place to monitor statements made by the company and its employees.
• Do not require users to agree not to make investment decisions based on the blog’s or forum’s content.
• Do not require users to disclaim liability for damages arising from the use or inability to use the blog or forum.

Disclosure Controls and Procedures

To enable the CEO and CFO to make their certifications regarding web site disclosure:

• Make sure that disclosure controls and procedures cover information that is included on the web site to satisfy SEC disclosure requirements.

Format

To make sure that the information on the web site complies with any required SEC format:

• Confirm that all information that is included on the web site to satisfy SEC disclosure requirements is presented in both printable and/or readable form, as required by SEC rules.

Conclusion

The Web Site Release provides significant principles-based guidance to companies on the use of company web sites. As discussed above, the SEC guidance is not comprised of bright-line tests and instead requires a company to examine all relevant facts and circumstances. The SEC’s guidance may be, at least for now, too general and with meaningful qualifications, so that only the largest companies that are widely followed by analysts and the media and have the most active trading markets will consider their company web site postings “public” under Regulation FD. However, the Web Site Release should stimulate companies to increase the use of their web sites as a meaningful and significant source and method of distributing information, even if it is not the exclusive source and method of distributing such information.

For more information, contact:

Laurie L. Green
954.468.7808
laurie.green@hklaw.com

toll free: 1.888.688.8500

Ms. Green extends her gratitude to Antoinette “Toni” Backhus, guest author, for co-authoring this article.

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1 Commission Guidance on the Use of Company Web Sites, Release No. 34-58288 (August 1, 2008).

2 Use of Electronic Media, Release No. 33-7856 (April 28, 2008)

Related Practices

• Public Companies and Securities