2011 Morrison & Foerster LLP All Rights Reserved mofo.com Use of Social Media for Issuers, Broker-Dealers, Advisers and Investment Companies May 28, 2013 Presented by: Jay G. Baris David M. Lynn Anna T. Pinedo NY2 719157
Caveat This outline is for informational purposes only and does not constitute legal advice or create an attorney-client relationship Consult your own attorney for legal advice on the issues discussed in this outline IRS Circular 230 Disclosure To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein This outline may constitute attorney advertising This is MoFo. 2
Agenda Today we will provide an overview of the issues that may arise in connection with the use of social media: By issuers for their ongoing communications By issuers in connection with securities offerings By broker-dealers and non-broker-dealers in the context of securities offerings By broker-dealers generally By investment companies and investment advisers This is MoFo. 3
Social Media and Issuers This is MoFo. 4
Social Media and Issuers Considerations with the use of social media by public companies: Antifraud considerations with social media communications Social media considerations under Regulation FD The use of social media during the offering process Social media has been embraced by companies for many purposes, but there has been uncertainty as to the federal securities law implications of using social media to communicate information to investors This is MoFo. 5
Antifraud Considerations Companies must consider the potential for insider trading and market manipulation concerns arising from the use of social media Considerations with the rapid and often informal nature of social media communications Employees acting as company representatives cannot avoid responsibility for material misstatements or omissions by purporting to speak in individual capacities Does the 140 character limit of a Tweet create a heightened potential for a material misstatement or omission? This is MoFo. 6
Antifraud Considerations (cont d) The SEC has said that a company is not responsible for statements that third parties post on a company-sponsored website, nor does a company have any obligation to correct a misstatement made by a third party A company can be held liable for third party information to which it hyperlinks from its website and which could be attributable to the company through concepts of: Entanglement; or Adoption This is MoFo. 7
Regulation FD Regulation FD provides: Whenever a public company, or any person acting on its behalf, discloses material nonpublic information to certain enumerated persons, the company must disclose that information either simultaneously (in the case of intentional disclosures) or promptly (in the case of unintentional disclosures) This is MoFo. 8
Regulation FD Guidance On April 2, 2013, the SEC issued guidance which indicates that social media channels could under certain conditions be used by public companies to disseminate material information, without violating Regulation FD Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69729 (April 2, 2013) The SEC emphasized that companies should apply the guidance from its 2008 interpretive release regarding the disclosure of material information on company websites when analyzing whether a social media channel is in fact a recognized channel of distribution, including the guidance that investors must be provided with appropriate notice of the specific channels that a company will use in order to disseminate material nonpublic information This is MoFo. 9
SEC Guidance on Use of Websites In Release No. 34-58288 (August 1, 2008), the SEC revisited its guidance on the use of technology to disseminate information, and provided three considerations for determining whether information posted on a corporate website is considered public such that a subsequent communication will not be deemed selective disclosure of material non-public information: Is an issuer s website a recognized channel of distribution? Is information posted in a manner calculated to reach investors? Is information posted for a reasonable period of time so that it has been absorbed by investors? This is MoFo. 10
SEC Guidance on Use of Websites (cont d) In the context of whether a website posting satisfies the public disclosure requirement of Regulation FD following the selective disclosure of material, non-public information, the guidance from the SEC s 2008 Interpretive Release indicates that issuers must consider whether website postings are reasonably designed to provide broad, non-exclusionary distribution of the information to the public In conducting this analysis, an issuer must examine the first two factors referenced in the prior slide, and also must consider whether its website is capable of meeting the simultaneous and prompt timing requirements under Regulation FD once a selective disclosure has been made This is MoFo. 11
SEC Guidance on Use of Websites (cont d) In order to facilitate an ongoing determination that a company s website is a recognized channel of distribution of material information concerning the company, it is suggested that the company take the following steps: In all company communications to investors, include a statement that the company routinely posts all important information about the company on its website, and include a reference to the url of the company s website Consider including a separate means to access the Investor Relations pages of the company s website from the main page of the website so that it is more readily apparent where investors may locate important information about the company that is posted on the company s website Monitor the dissemination of information to determine the extent to which information reaches intended audiences and the extent to which persons access the company s website for material information about the company This is MoFo. 12
Proxy Solicitations Exchange Act Rule 14a-1 defines solicitation and solicit to include any communication to security holders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy Proxy solicitations are subject to SEC requirements, including in some instances filing requirements, as well as the applicability of antifraud rules Social media communications by a company could be deemed to be proxy solicitations and investors may in turn communicate about issues regarding a proxy solicitation through social media outlets This is MoFo. 13
Electronic Shareholder Forums Exchange Act Rule 14a-17 permits the use of electronic shareholder forums to facilitate communications within limits prescribed by the rule A company that sets up or runs an electronic shareholder forum will not be liable under the federal securities laws for any statement made or information provided by another person on the forum Would the SEC take the position that Twitter or Facebook constitutes such an open online discussion forum? Such a view could provide the company with express protection for the statements of third parties This is MoFo. 14
Electronic Shareholder Forums (cont d) A company remains responsible for its own statements and statements made on its behalf and could also be held responsible for a third party statement if the company takes action to adopt, endorse or approve the statement For example, if a user tweets a false or misleading statement about a company, and the company then tweets in a way that approves the statement through an exchange with the user, then the company could be held responsible for that statement Exchange Act Rule 14a-2 provides express protection with respect to the proxy solicitation rules, as long as the communication occurs 60 days prior to the date of the company s annual or special shareholder meeting and no proxy is sought This is MoFo. 15
Other Considerations Problems with age of information on Twitter and Facebook is the information stale? No capability to archive A post can be deleted, but may not be immediately removed from the advanced search function There is website dedicated to searching for deleted tweets. Providing requisite disclaimers for the forward looking statements safe harbor Compliance with Regulation G with respect to non-gaap measures This is MoFo. 16
Offering Related Issues This is MoFo. 17
Securities Offering Considerations The use of social media for company communications can raise concerns in connection with both private and public offerings of securities Social media communications could potentially result in: Impermissible general solicitation or general advertising in connection with a private offering Gun-jumping or conditioning the market in connection with public offerings Company communications that are subject to special rules for the use of a free writing prospectus in connection with public offerings This is MoFo. 18
Communications under Section 5 Filing Effectiveness Time Section 5(c) Pre-Filing Period Section 5(b)(1) Waiting Period Post-Effective Period Section 5(a) and 5(b)(2). What you can use; Permissible announcements (below) Preliminary negotiations with underwriters What you can use: Red Herring Prospectus Summary Prospectus Rule 134 Tombstones Oral Offers (Road Shows) Rules 164 and 433 Free writing prospectuses What you can use: Final Prospectus Supplemental Sales Material Permissible Announcements: Rule 163 Pre-filing free writing prospectuses by WKSIs Rule 163A Bright line 30-day safe harbor Rules 168 and 169 Information released in the ordinary course Rule 135 Notice of certain proposed offering Rule 135c Announcements of private placements Rule 135e Offshore meetings and press releases Release No. 33-5180 Information released in the ordinary course Section 5(d) Test the waters communications by emerging growth companies to QIBs and institutional accredited investors This is MoFo. 19
Public Offering Considerations The SEC has indicated that statements made through electronic means, such as website postings and e-mails, can be deemed written offers for the purposes of the communications rules under the Securities Act Ongoing monitoring of social media communications is necessary to avoid concerns that written offers are being made other than by means of a prospectus or other permitted communications There is close scrutiny of company websites, media outlets and other information sources in connection with the review of IPO registration statements by the SEC Impermissible communications in connection with an offering can have significant consequences for the company and offering participants This is MoFo. 20
Private Offering Considerations (cont d) Regulation D provides an exemption for companies conducting private offerings meeting the conditions in Rule 502 Rule 502(c) prohibits an issuer or any person acting on the issuer s behalf from offering or selling securities by any form of general solicitation or general advertising Such prohibited communications include any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising Social media could be considered similar media for this purpose and communications through social media websites could cause general solicitation concerns in connection with private offerings This is MoFo. 21
Hybrid Offering Considerations Hybrid offerings are securities offerings that have characteristics of private offerings and of public offerings (e.g., PIPEs, registered directs, wall-crossed deals) Current volatile market environment -- short selling upon the announcement of a public offering Potential harm resulting from inability to price an announced deal. Hybrid offerings utilize confidential marketing period Confidentiality agreements Proliferation of finance blogs and other social media sites can increase risks of leaks that would undermine the confidential marketing process This is MoFo. 22
Existing SEC Guidance on Using the Internet Broker-Dealer Sites 1995 SEC Release: where prospective purchasers have been otherwise located, without a general solicitation, a proprietary service could be used to deliver required disclosure documents IPONet letter (1996): broker-dealer contacting potential investors with whom it had no pre-existing relationship to pre-qualify the investors as accredited investors and subsequently grant access to a password-protected site for private offerings available AFTER the investors had been qualified However (pre-jobs Act), directing solicitations to accredited investors, without taking appropriate precautions or implementing safeguards, would not be sufficient (CGI Capital action) This is MoFo. 23
Existing SEC Guidance on Using the Internet Broker-Dealer Sites In CGI, SEC noted that the email sent to accredited investors did not restrict them from forwarding to others, didn t discuss the limited nature of the offering or provide for any other procedural safeguards This is MoFo. 24
Existing SEC Guidance on Using the Internet (cont d) Non-Broker Dealer Sites 1997/8: SEC issued guidance to Lamp Technologies, which published hedge fund related information Lamp followed a process of pre-qualifying investors, then providing access to a password-protected website. Because fund offerings are continuous, a 30-day waiting period was imposed from qualification to first investment This is MoFo. 25
Existing SEC Guidance on Using the Internet (cont d) Non-Broker Dealer Sites Matchmaking sites: even prior to the JOBS Act, the SEC had issued no-action letter guidance to various sponsors of matchmaking sites that used the internet to sponsor or maintain sites that provided information regarding companies seeking financing The matchmaking guidance has focused principally on whether the types of activities in which the sponsors engage would give rise to a requirement to register as broker-dealers or advisers Title II of the JOBS Act provides greater certainty for matchmaking sites The SEC also has issued no-action letter guidance to FundersClub and AngelList regarding particular proposed business models and whether the scope of the activities would trigger a requirement to register as broker-dealers This is MoFo. 26
Existing SEC Guidance on Using the Internet (cont d) Offshore Offerings Would posting offering material on a site be considered a directed selling effort in the context of a Regulation S offering? Website must have a prominent disclaimer that makes clear the offer is directed at non-u.s. Persons Procedures must be implemented to ensure no sales are made to U.S. persons in the Reg S offering The SEC s 1998 Offshore Internet Release provides some examples of additional measures that can be taken, such as maintaining records of who participated; implementing access-restrictions; making only non-u.s. offering materials available Rule 144A Offerings Net Roadshow and other letters provide guidance regarding the restrictions to be implemented This is MoFo. 27
Broker-Dealers This is MoFo. 28
Broker-Dealers FINRA has long recognized the potential for compliance issues posed by use of social media 1999: Registered representative s participation in an internet chat room is subject to the same requirements as a presentation in person before group of investors 2003: FINRA codified this guidance when it defined the term public appearance to include participation in an interactive electronic forum 2009: FINRA establishes Social Media Networking Task Force 2010: FINRA publishes Regulatory Notice 10-06 Social Media Web Sites: Guidance on Blogs and Social Networking Web Sites 10-06 reminds firms of their recordkeeping, suitability, supervision and content requirements Essentially, FINRA takes the view that all rules applicable to traditional communications are applicable to social media This is MoFo. 29
Broker-Dealers 2011: Guide to the Internet for Registered Representatives FINRA is not so much concerned about the form of communication from a registered representative as it is about the content of the communication and whether the representative obtained prior supervisory approval for the communication FINRA has penalized representative who posted tweets touting a particular security without principal approval 2011: FINRA publishes Regulatory Notice 11-39 Social Media Websites and the Use of Personal Devices for Business Communications: Guidance on Social Networking Websites and Business Communications The Notice provides additional guidance, building on the guidance provided in 10-10-06 2012: FINRA publishes podcasts concerning social media and personal electronic devices 2012 More firms experiment with social media This is MoFo. 30
Communications FINRA revised its communications rules, Rule 2210, and the new rules became effective February 2013. New Rule 2210 simplifies the categories of communications, reducing the categories to three: Old Rules Advertisements. Sales literature. Correspondence. Institutional sales material. Independently prepared reprint. Public appearance. New Rules Institutional communication. Retail communication. Correspondence. This is MoFo. 31
Communications Retail Communications: written and electronic communications distributed or made available to more than 25 retail investors within any 30-day period Correspondence: 25 or fewer retail investors within a 30-day period Institutional Communications: communications made available only to institutional investors (term doesn t include a member s internal communications) This is MoFo. 32
Suitability obligations A broker-dealer has a suitability obligation must ensure that any recommendation relating to a security or an investment strategy is suitable for the particular customer On a website or blog, it may be difficult to distinguish general commentary and specific recommendations This is MoFo. 33
Recordkeeping Rules 17a-3 and 17a-4: a broker-dealer must retain electronic communications made by the firm and associated persons relating to the firm s business Is the communication business related? Rules are the same for static and interactive communications Cannot sponsor or use sites that automatically erase content Third-party posts also may be subject to recordkeeping requirements, depending on facts and circumstances This is MoFo. 34
Supervision and training A broker-dealer is required to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to ensure compliance with applicable FINRA rules Sites should be approved for business use Prior to permitting associated person to use the site, associated person must have undergone training so that there is some assurance that the associated person can comply with applicable FINRA rules Firm should supervise the site This may include reviewing the first post in any interactive forum Post-use review may be undertaken using search technologies Random spot checks Annual or periodic compliance certifications Policies regarding links to third-party postings/responding to third-party posts This is MoFo. 35
Links, third-party posts A broker-dealer may become responsible for third-party posts, as well as for recommendations or endorsements Responses to third-party posts: firms will want to consider a policy in respect of responding to third-party posts; blocking/screening third-party posts; publishing their policies regarding third-party posts Data feeds and financial tools provided by a broker-dealer (or its personnel) also must be managed and tested This is MoFo. 36
Investment Companies and Advisers This is MoFo. 37
Investment Companies Filing requirements for fund electronic communications Funds may be required to file interactive content posted in real-time electric forums including chat rooms and other social media ( interactive content ) if FINRA does not require it to be filed The Division of Investment Management position (March 2013) Filing requirement depends on content, context and presentation of particular communication Examples of interactive communications that funds don t have to file Incidental mention of specific funds unrelated to investment merits Incidental use of the word performance in connection discussion of a fund without specific mention of elements of the fund s return We update performance of our funds every month and publish them on our website When reviewing a fund s performance, it is important to consider performance against a benchmark This is MoFo. 38
Investment Companies (cont d) Examples of interactive communications that funds don t have to file Incidental mention of specific funds unrelated to investment merits Incidental use of the word performance in connection discussion of a fund without specific mention of elements of the fund s return We update performance of our funds every month and publish them on our website When reviewing a fund s performance, it is important to consider performance against a benchmark Factual introductory statements including a hyperlink to a prospectus Introductory statement unrelated to a discussion of investment merits of a fund that includes a hyperlink and discussions of basic investment concepts or commentaries on economic, political or market conditions Our date shows the average 401(k) balance is the highest it s been in more than 10 years! This is partly due to increasing employer and employee contributions The election is over, what is next for our economy? See our report analyzing the elections Responses to inquiries that provide discrete factual information unrelated to fund performance This is MoFo. 39
Investment Companies (cont d) Examples of interactive communications that funds should have to file Discussions of fund performance that mention elements of a fund s return or that promotes a return The fund slightly underperformed its benchmark, the S&P 500 Index, during the quarter that ended March 31, 2013 Communications initiated by users that discuss investment merits of the fund Looking for dividends? Think global and consider our new Global Equity Fund [website url] This is MoFo. 40
Investment Advisers Growing use of social media by registered investment advisers presents compliance challenges RIAs use social media to communicate with new and existing clients, promote services, educate investors and recruit new employees Compliance policies and procedures Rule 206(4)-7 requires RIAs firms using social media to adopt and periodically review the effectiveness of policies and procedures regarding social media, especially in the fact of rapidly changing technology Division of Investment Management notes lack of comprehensive compliance programs to monitor use of social media Many firms have disparate or overlapping procedures Focus on identifying conflicts of interests This is MoFo. 41
Investment Advisers (cont d) Division of Investment Management provided guidance to RIAs that use social media (January 2012) Compliance program related to use of social media Factors to consider when evaluating effectiveness of compliance program Usage guidelines Content standards Monitoring Frequency of monitoring Approval of content Firm resources Criteria for approving participation Training Certification Functionality Personal/professional sites Information security Enterprise wide sites This is MoFo. 42
Investment Advisers (cont d) Division of Investment Management provided guidance to RIAs that use social media (January 2012) Posting third-party content on social media sites presents compliance challenges Some RIAs take conservative approach and prohibit postings by general public Some RIAs post disclaimers of responsibility in attempt to avoid liability for postings Testimonials Testimonials generally are prohibited by Rule 206(4)-1(a)(1) Third-party use of like feature on RIAs social media site could be deemed to be a testimonial if it is an explicit or implicit statement of a client s experience with RIA Recordkeeping Rule 204-2 requires RIAS to keep certain books and records related to their advisory business Rules do not distinguish between various media, including paper and electronic communications, such as e-mails, IMs and other electronic communications This is MoFo. 43
Investment Advisers (cont d) Recordkeeping Staff urges RIAs to review document retention policies to ensure that they retain required records for requisite time periods (generally five years) RIAs should determine whether each type of social media communication is a required record, and if so, the applicable retention period and accessibility Form of retention Employee training Indexing of records Periodic test checking (e.g., key word searches) Third party record keepers This is MoFo. 44
Liability Issues This is MoFo. 45
SEC Guidance The SEC in its releases has referred to various theories of liability An issuer or a broker-dealer may be responsible for third-party content if: it was involved in preparing the information; or it explicitly or implicitly endorses the information. Has an issuer or broker-dealer adopted the information? This can be determined by considering: The content of the link: what is being said about the link, or the reason why the link is provided The possibility for confusion: is a reader likely to be confused about the source of the information The presentation of the information the SEC seems to place wait on the proximity of information and has discussed proximity and placement in the context of its cul-de-sac and envelope theories This is MoFo. 46
SEC Guidance Disclaimers: a disclaimer alone is likely insufficient to mitigate liability This is MoFo. 47