Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Corporate Finance, October 2008
In light of ongoing developments in web-based technology and the dramatic increase in the use of the Internet, the SEC recently published an interpretive release (the SEC Release) updating its guidance on the use of company websites as a means of disclosing corporate information under U.S. securities laws. The SEC Release encourages SEC issuers to use company websites to provide public disclosure and highlights circumstances under which website disclosure alone may meet U.S. disclosure rules, and practices companies should adopt to avoid contravening applicable antifraud provisions. In Canada, National Policy 51-201 – Disclosure Standards (NP 51-201) also encourages the use of company websites as a means of disclosing corporate information but only as a supplement to, and not substitute for, traditional forms of dissemination. However, NP 51-201 was originally informed by SEC policies regarding the use of company websites and the new position taken in the SEC Release could provide impetus for Canadian regulators to revisit NP 51-201. NP 51-201, originally introduced in 2002, states that Canadian regulators will revisit this issue as technology evolves and more investors gain access to the Internet.
The SEC Release provides guidance on (i) when information posted on a company website is deemed to be "public" for the purpose of Regulation FD and therefore not subject to selective disclosure requirements, (ii) company liability for information posted on its website, and (iii) the format in which information should be posted on company websites.
WEBSITE DISCLOSURE AND PROHIBITION ON TIPPING
Under Regulation FD, issuers may not selectively disclose (commonly known as "tipping") material, non-public information to a select group of people (generally shareholders or investment professionals). If a company does disclose material, non-public information, it must promptly or simultaneously publicly disclose such information through an SEC filing or through another method of disclosure reasonably designed to provide broad, non-exclusionary distribution of such information to the public. Information that is deemed to be "public" does not trigger the selective disclosure requirements. Canadian securities laws similarly prohibit an issuer from tipping material information to certain individuals before the information is "generally disclosed" to the market.
In the past, the SEC's position was that information posted on a website alone is not "public". However, the SEC Release now suggests that website disclosure alone may be sufficient if (i) the issuer's website is a recognized channel of distribution, (ii) posting information on the issuer's website disseminates the information in a manner that makes it available to the market in general, and (iii) there has been a reasonable waiting period for investors and the market to react to the posted information. An analysis of whether website disclosure satisfies Regulation FD will be based on the facts and circumstances of each case. However, the SEC Release provides guidance on factors that will inform such analysis.
Recognized Channel of Distribution
Whether a company's website is a recognized channel of distribution would depend on the steps the company has taken to alert the market to its website and its disclosure practices.
Broadly Disseminated to Market
Whether information on a company website is broadly disseminated to the market would depend on:
- whether the issuer has a pattern or practice of posting important information on its website;
- the extent to which information posted on the website is regularly picked up by the market and readily available to the media;
- the size of the market following of the issuer (i.e., small, less visible issuers may need to be more proactive in letting investors know information is available on their websites);
- whether the issuer keeps its website accurate and current; and
- whether the issuer uses other more predominant methods of distribution.
Reasonable Waiting Period
What would constitute a reasonable waiting period for the market to react to information posted on an issuer's website before it is deemed to be "public" would depend on the circumstances of dissemination including the size and market following of the company, the extent to which investor oriented information on the website is regularly accessed and the nature and complexity of the information.
LIABILITY FOR WEBSITE DISCLOSURE
The SEC Release also reiterates that an SEC issuer will be liable under antifraud provisions of U.S. securities laws for any material misstatement or omission of fact on their website and highlights some related areas of concern including (i) the presentation of historical information, (ii) hyperlinks to third-party websites, (iii) the presentation of summary information and (iv) company-sponsored blogs or electronic shareholder forums. In Canada, issuers, their directors and officers, and any person who knowingly influenced the issuer, director or officer to post the information, may also be held liable for misrepresentations on an issuer's website under the civil liability regime for secondary market disclosure, subject to available defences. Available defences include:
i) Non-Core Document/No Knowledge. A company or person will not be held liable if the posted information was not in a "core document" (i.e., a document filed with securities regulators), and the company or person did not know, or was not grossly negligent in not knowing that, the information contained a misrepresentation.
ii) Due Diligence. A company or person will not be held liable if the company or person conducted a reasonable investigation and had no reasonable grounds to believe the posted information contained a misrepresentation.
iii) Forward-Looking Disclaimer. A company or person will not be held liable for a misrepresentation in posted forward-looking information if a disclaimer was posted proximate to the information containing cautionary language identifying the forward-looking information, identifying factors that could cause actual results to differ materially, and a statement of the factors or assumptions that were applied in connection with the forward-looking information.
Given the similarities between the regimes, the following guidance is instructive in respect of website best practices in Canada.
The SEC Release clarifies that SEC issuers will not perpetually be held liable for historical information available on their website that may be inaccurate, though it was accurate at the time of posting. Only when an SEC issuer affirmatively restates or reissues a historical statement will it be subject to potential liability under the antifraud rules. The SEC does suggest, however, that SEC issuers should clearly identify materials on their websites as historical by dating the posted materials or statements and locating them in a separate section of the website.
Hyperlinks to Third-Party Information
The SEC also provides guidance on when hyperlinks to third-party information might be attributable to an SEC issuer and therefore result in liability for misrepresentations therein. Under U.S. securities laws, whether third-party information is attributable to an SEC issuer depends on whether the issuer has involved itself in the preparation of the information, or explicitly or implicitly endorsed or approved the information. Under Canadian securities laws, issuers may be similarly liable for a misrepresentation in a third-party document it releases (in written or electronic form) whether or not it authored or approved its content.
According to the SEC, to avoid confusion as to whether an SEC issuer has implicitly endorsed or approved third-party information, where an SEC issuer has provided a hyperlink on its website, it should explain the context of the hyperlink and be explicit as to why the hyperlink is provided. The SEC is of the view that detailed explanations are required where an SEC issuer is selective about the third-party information is posts (such as a specific favourable news article or analyst's report), while more general explanations are sufficient where posted information is indiscriminate. For example, if an issuer has a media page and simply provides hyperlinks to recent news articles about the issuer, both positive and negative, the risk that the issuer may be liable for a particular article due to the inference that it endorses that particular article is reduced. NP 52-201 provides similar guidance with regard to posting analysts reports on a company website and suggests that where one analyst report is posted, the names and recommendations of all analysts who cover the company should be similarly posted.
The SEC notes that summary information posted on a website can be helpful to investors. However, to avoid situations where an investor fails to appreciate that the information is not complete, SEC issuers are encouraged to highlight the nature of summary information by using appropriate titles and providing additional explanatory language to identify the location of, or provide hyperlinks to, the more detailed information from which the summary is derived.
Company-Sponsored Blogs and Electronic Shareholder Forums
The SEC also acknowledges the utility of interactive web features such as company-sponsored blogs and electronic shareholder forums but cautions that issuers will be held liable for misrepresentations made by company representatives in such forums to the same extent as in other communications. However, the SEC states that SEC issuers will not be held liable for statements posted on blogs or shareholder forums by third parties nor are they required to respond to or correct third-party misstatements. The SEC Release also stresses that SEC issuers cannot require investors to waive protections under U.S. securities laws as a condition to entering or participating in a blog or forum.
FORMAT FOR WEBSITE DISCLOSURE
Finally, the SEC expresses in the SEC Release its position that information on a company website, including information posted to comply with reporting obligations under U.S. securities laws, need not be laid out in a manner that complies with "printer-friendly presentation standards" unless such a layout is otherwise explicitly required by SEC rules (as with proxy materials, for example).
The SEC Release represents a marked change in the SEC's position on the use of company websites for public disclosure, a position more aligned with the proliferation of company websites and advances in web-based technologies. Until Canadian regulators similarly revisit their policies under NP 51-201 on this issue, the SEC Release will likely become a benchmark for best practices in website disclosure for Canadian issuers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.