On the heels of a January 2019 announcement that it was charging nine persons with participation in a scheme that allowed them to hack into the SEC’s confidential database of public filings, commonly known as EDGAR. On February 28, the SEC named Gabriel Benincasa as its first-ever Chief Risk Officer (CRO). Although the two events have no direct causal link, they serve as useful reminders that the SEC is determined to re-emphasize its mission to ensure the smooth operation of the U.S. securities markets and to root out and punish instances of fraud and market manipulation, be it by traditional methods or where digital tools are implicated and databases are compromised. The position of CRO is a new one at the SEC. Created by SEC Chairman Jay Clayton to strengthen the agency’s risk management and cybersecurity efforts, Benincasa’s office will help to coordinate efforts to identify, monitor and address risks facing the agency.
In a time when information is increasingly shared through social media, companies—particularly publicly traded ones—must recognize and consider the potential legal ramifications that could arise from statements made by executives, board members, and/or other employees about the company on social media. Though the actions of a certain well-known technology entrepreneur have provided perhaps the most prominent example of these ramifications, there are plenty of other cautionary tales reminding us that a powerful marketing tool that allows company CEOs to connect directly with consumers carries a host of possible legal consequences. Among the most potentially damaging—time-consuming and costly securities-related litigation, both with complaints involving the SEC and private shareholder litigation.
Last Tuesday afternoon, Elon Musk tweeted from his personal handle, “Am considering taking Tesla private at $420. Funding secured.” These words drove Tesla’s share prices up by 10% on Tuesday before Nasdaq halted trading, increasing Musk’s estimated net worth by $1.4 billion dollars.
Since then, there has been a lot of speculation about Musk’s tweet, including about whether it violated SEC rules. News outlets reported last week that the SEC has contacted Tesla to inquire as to the accuracy of the tweet, a move that could indicate the start of a more formal investigation.
A recent order by the SEC relating to an initial coin offering (ICO) by Munchee Inc. dealt a blow to the common practice of making a distinction between “utility tokens” and “security tokens.” In doing so, the SEC seems to also reject what our colleagues Daniel N. Budofsky and Robert B. Robbins refer to as the “magic frog” approach, the belief that a token can begin life as a security token (i.e., a magic frog) but at the point that the application and ecosystem go “live,” the token will be transformed into a utility token (i.e., the magic frog becomes a prince) and any securities law restrictions will no longer apply. In their recent client alert, “The SEC’s Shutdown of the Munchee ICO,” they examine this issue in greater detail and explore ways in which it is still possible to carry out an ICO that’s in compliance with the Securities Act.
Social media is quickly becoming the way that companies present and market themselves to the world. Companies are also realizing the value social media provides in an easy conduit to communicate with customers. But the same qualities that make social media valuable can also lead to negative consequences. While information can be shared easily and instantaneously through social media, retracting such information is another story. Furthermore, the audience is not easily limited. So when it comes to the context of mergers and acquisitions, should social media have a role?
In their recent Client Alert, colleagues David S. Baxter, Robert B. Robbins, Jonathan J. Russo, and Matthew J. Kane examine the SEC’s adoption of “Regulation Crowdfunding,” the long-awaited final rules regulating what has become the investment vehicle of choice for many creators, entrepreneurs and consumers alike in the Internet Age. Regulation Crowdfunding will allow smaller, private U.S. companies to raise up to one million dollars in a 12-month cycle by selling securities over the Internet or web-based apps and other tech to small individual investors.
As social media companies and businesses rely more heavily on their social media platforms to make important company announcements, state law claims asserting negligent misrepresentation or failure to adequately disclose information relating to announcements made on these outlets are bound to arise.
The evolution of social media in business from “occasional accessory” to “integral component” has in turn forced the law itself to evolve in an attempt to address social media’s increasing relevance. Recent developments in two different areas of law show a newly evidenced recognition of social media’s importance in business.
The Securities and Exchange Commission issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.
According to an SEC press release:
- The SEC’s report confirms that Regulation FD applies to social media and other emerging means of communication the same way it applies to company websites.
- The SEC issued guidance in 2008 clarifying that websites can serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it.
- The recent report clarifies that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis.
- Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.
According to George Canellos, Acting Director of the SEC’s Division of Enforcement “One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information. Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”
The SEC’s report of investigation stems from an inquiry the Division of Enforcement launched into a post by Netflix CEO Reed Hastings on his personal Facebook page stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time. The SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix, citing market uncertainty about the application of Regulation FD in this context.
Click here for a full copy of the SEC Report
For additional information on social media legal issues please contact us.
Back in January, we reported that the SEC released a National Examination Risk Alert addressing investment adviser use of social media.
Now, the SEC’s guidance could be particularly important given the “crowdfunding” legislation Congress is currently considering. Crowdfunding is a method of capital formation where groups of people
pool money, typically by use of very small individual contributions, in
order to support the organizers that seek to accomplish a specific goal.
The Senate currently is considering its own version of a crowdfunding
bill, the Democratizing Access to Capital Act of 2011 (S. 1791). S. 1791 provides for registration exemptions for certain crowdfunded securities if the aggregate amount raised through the issuance is $1 million or
less each year and each individual who invests in the security does not
invest more than $1,000. The Senate Committee on Banking, Housing and
Urban Affairs held hearings on December 1 and 14, 2011, regarding this
legislation, but a vote on the bill has not yet occurred.
For more information on this, please see Pillsbury’s recently released Client Alert.